Understanding Margin Lending and Prime Brokerage under SFTR


Defining SFTR & SFTs

The Securities Financing Transactions Regulation (SFTR) applies to transactions linked to the build-up of leverage, pro-cyclicality, liquidity and maturity transformation, and interconnectedness in the financial markets.

It aims to regulate securities financing activities by setting out reporting requirements data access, collection, verification, aggregation, comparison and publication of data for securities financing transactions (SFTs) by trade repositories (TRs).

An SFT could be any transaction in which securities are used to borrow cash or vice versa.

For the most part, this includes repurchase agreements (repos), securities lending activities, and sell/buy-back transactions. In each of these transactions, ownership of the securities temporarily changes hands in return for cash. Following the SFT’s conclusion, this change in ownership reverts itself with both counterparties ending up with what they had initially possessed, plus or minus a small fee depending on the transaction’s purpose. Ultimately, SFTs act like collateralised loans.

The categories of SFTs in SFTR include:

  1. Repurchase transactions
  2. Securities or commodities lending and borrowing
  3. Buy-sell back or sell-buy back transactions
  4. Margin lending transactions

When Does a Transaction Fall Under the Scope of SFTR?

There are two main scenarios under which a transaction may be affected by SFTR:

  • The transaction leads to the build-up of leverage, procyclicality and interconnectedness in the financial markets or it contributes to liquidity and maturity transformation.
  • The transaction is subject to margin agreements between financial institutions and their clients.

The transaction should be a secured (i.e. collateralised) transaction that involves the temporary exchange of cash against securities or securities against other securities. If the collateral giver defaults, the collateral taker retains the collateral to cover potential losses.

Margin Lending

As per SFTR, the definition of a margin lending transaction is “a transaction in which a counterparty extends credit in connection with the purchase, sale, carrying or trading of securities, but not including other loans that are secured by collateral in the form of securities”.

With regards to reporting margin lending transactions, the purpose of SFTR is to capture transactions that serve the same purpose as repurchase transactions, buy-sell back transactions or securities lending transactions. These transactions pose similar risks to financial stability by allowing the build-up of leverage, pro-cyclicality and interconnectedness in the financial markets or by contributing to liquidity and maturity transformation.

While margin lending includes transactions subject to margin agreements between financial institutions and their clients, ones in which financial institutions provide prime brokerage services to their clients, loans that do not pose systemic risks are not included. These might be, for example, loans for corporate restructuring purposes.

Prime Broker

ESMA defines a prime broker as “a credit institution, a regulated investment firm or another entity subject to prudential regulation and ongoing supervision, offering services to professional investors primarily to finance or execute transactions in financial instruments as counterparty and which may also provide other services such as clearing and settlement of trades, custodial services, securities lending, customised technology and operational support facilities”.

When is a Prime Brokerage Captured by SFTR?

ESMA’s position is that the margin lending reporting obligation should only apply to prime brokerage margin lending, i.e. cash lending from prime brokers to their clients against collateral as part of a prime brokerage agreement.

ESMA further explains the context of prime brokerage margin lending:

  • Prime brokerage margin lending takes place on a portfolio basis, against a pool of collateral, by using or reusing assets in the client’s margin account as collateral.
  • The relationship between financial entities involved in margin loans is relatively simple compared to other types of SFTs. The basic prime brokerage margin lending scenario involves the borrower and the lender as the two counterparties. Lenders are prime brokers, while borrowers are usually investment funds.
  • In the context of prime brokerage, margin lending does not rely on standardised master agreements that govern most other types of SFTs. It typically relies on bilateral prime brokerage agreements between the lender and the borrower that specify the terms and conditions of the margin account. Prime brokerage agreements are negotiated between prime brokers and their clients.

What About CFD Brokers?

CFD trading cannot be captured by margin lending since the offering of leverage, which can be considered as an extension of credit, is not in connection with the purchase, sale, carrying or trading of securities. Also, there is no temporary exchange of cash against securities or securities against other securities.

However, if a CFD broker also provides the service of actual securities trading, it needs to determine whether it is considered a prime broker in relation to the margin lending transactions provided to its clients. By doing this, the CFD broker will be able to assess whether or not this credit extension is captured by SFTR.

How Does Margin Lending Work

For example, brokerage customers signing a margin agreement can borrow up to 50% of the purchase price of marginable investments. In other words, investors can use margin to potentially purchase double the amount of marginable stocks than they could when using cash. Keep in mind, however, that the exact amount varies depending on investment.

If you have, say, $5,000 in cash in a margin-approved brokerage account, you could buy up to $10,000 worth of marginable stock. In other words, you would pay 50% of the purchase price and your brokerage firm would loan you the other 50%. That way you have $10,000 in buying power.

Similarly, you can often borrow against the marginable stocks, bonds and mutual funds already in your account. For example, if you have $5,000 worth of marginable stocks in your account and you haven’t yet borrowed against them, you can purchase another $5,000. The stock you already own provides the collateral for the first $2,500, while the newly purchased marginable stock provides the collateral for the second $2,500. You now have $10,000 worth of stock in your account at a 50% loan value, with no additional cash outlay.

Because margin uses the value of your marginable securities as collateral, the amount you can borrow fluctuates on a daily basis along with the value of the marginable securities in your portfolio.

As with any loan, when you buy securities on margin you have to pay back the money you borrow plus interest, which varies based on your brokerage firm’s policies and the amount of the loan.


How can MAP FinTech assist you?

MAP FınTech, under its SFTR reporting service, and on behalf of the client, reports the execution details of each SFTR Reportable Transaction and of any modification, update or termination to a TR within the timeframes set by the SFTR Legislation. Via this service, MAP FinTech also maps all contractual data with the technical requirements mandated by the SFTR Legislation. MAP FinTech will maintain and update the pertinent fields to reflect the latest SFTR transaction reporting requirements.

Key Features

  • Scalable solution that can report as many transactions as you have.
  • User-friendly portal to help you report the necessary information and routinely monitor your reporting.
  • Comprehensive field, data and entity mapping capability.
  • Multiple reporting health checks (validations) for both content and schema.
  • Automatic conversion of data to XML.
  • TR connectivity and support covering all types of transactions and action types.
  • On-going communication with regulators to ensure the system reports reflect regulatory updates and changes.


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