A more proactive collateral management approach can greatly enhance somewhat strained investment firm returns. Businesses are currently facing new regulations that need to be complied with, such as the recently adopted SFTR* instructions for monitoring the corresponding underlying risk and controlling collateral reinvestment practices.

* ‘Securities Financing Transactions European Regulation (SFTR)’ 

Collateral Reinvestment

The SFT Regulation impacts any EU Investment counterparty involved in Repos, Stock Lending, BSB contracts as well as other OTC contracts such as TRS (Total Return Swaps). Provisions are mainly:

  • Five year record keeping after the agreement has been finalized
  • Requirements for counterparties using received collaterals for new contracts (13/07/2016)
  • Reporting to trade repositories (13/07/2017)
  • Changes in UCITS/AIFs periodic reports (13/01/2017) and pre-contractual documents (13/07/2017)

Asset managers need to adapt their internal accounting practices in order to identify such transactions. The traceability of the collateral reuse and the reporting process are crucial in order to avoid any penalties brought under this regulation.

NeoXam Compliance (NXC) and Accounting solutions (NX GP3) are the appropriate solutions for monitoring UCITS rules on collaterals reinvestment as well as for supplementing annual statements with the required additional information.

Monitoring UCITS rules on collaterals reinvestment

In order to mitigate the counterparty risk on OTC markets, regulators have increased their oversight on collaterals received by UCITS from their counterparties.

To meet these provisions, NeoXam Compliance provides you with a set of rules including:

  • A Collateral Eligibility rule built on specific regulatory criteria such as the asset liquidity level, the rating quality of the issuer…
  • A Diversification rule applying to non-cash received collaterals issued by the same issuer that should be limited to a specified threshold of the fund total net asset
  • Counterparty risk reduced by received collaterals after applying specific haircuts
    Reinvested collaterals are taken into account in all of the preceding rules, i.e.:
    • New assets resulting from reinvestment of collaterals are still to be considered as collaterals and monitored in all of the preceding rules (collateral diversification rule, counterparty risk with the cash collateral initial haircut…)
    • These assets must also be included in standard rules (issuer rules …). 

      Reinvested collaterals are additionally taken into account in:
    • A Specific Eligibility rule: New assets and Reverse Repos positions resulting from reinvestment of cash collaterals should meet regulatory eligibility criteria
    • A Leverage rule: Cash Collateral received for OTC Derivatives and reinvested to buy other securities must be part of the leverage calculation according to the commitment method

Supplementing your annual/semi-annual reports with the SFT Regulation information

Appendix A of SFTR (2015/2365) details the information required in the annual statements published on/after 13/07/2017. UCITS/AIF shall report information on SFT/TRS. Additional data is required for the collaterals and their reuse.

To meet these provisions, NeoXam GP3 provides you with a set of software tables supplementing the national annual and semi-annual statements including:

  • Positions on SFT/TRS
    • Assets engaged in monetary terms and as a percentage of the fund total net asset
    • Top ten counterparties
    • Breakdowns per residual maturity
    • Return and costs
  • Collaterals
    • Ten largest issuers
    • Breakdown by residual maturity
    • Amount of reused collaterals as a percentage of the maximum amount specified in the prospectus
    • Reinvestment returns
    • Information on custodians in charge of the collaterals safekeeping
    • Information on type of accounts for holding the posted collaterals 

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