What are SFTs?
Securities financing transactions (SFTs) allow investors and firms to use assets, such as the shares or bonds they own, to secure funding for their activities.
A securities financing transaction can be
- a repurchase transaction - selling a security and agreeing to repurchase it in the future for the original sum of money plus a return for the use of that money
- lending a security for a fee in return for a guarantee in the form of financial instruments or cash given by the borrower
- a buy-sell back transaction or sell-buy back transaction
- a margin lending transaction
European rules enhancing transparency of SFTs
During the financial crisis, regulators and supervisors had difficulty anticipating risks in the area of securities financing. This was mainly due to lack of data.
The need for enhanced transparency and reduced risk around SFTs has been repeatedly called for, see for example
In 2015 the EU therefore adopted the securities financing transactions regulation (SFTR) to increase the transparency of SFTs by requiring
- all SFTs, except those concluded with central banks, to be reported to central databases known as trade repositories
- information on the use of SFTs by investment funds to be disclosed to investors in the regular reports and pre-investment documents issued by the funds
- minimum transparency conditions to be met when collateral is reused, such as disclosure of the risks and the obligation to acquire prior consent