A funny story about the SFTR
March 14, 2018

"Would you be interested in a funny story about the SFTR (Securities Financing Transaction Regulation)?" asks Richard Comotto, Senior Visiting Fellow at ICMA Centre. He immediately launches into the said story without waiting for a reply.

"There aren't many. The EC (European Commission) has defined a repo but the definition is a disaster. I was told that it was the result of locking 28 lawyers in a room in Brussels with simultaneous translators, neither group having much if any experience of repo, after they had failed to reach agreement.

"This is the definition: ‘repurchase transaction' means a transaction governed by an agreement by which a counterparty transfers securities, commodities, or guaranteed rights relating to title to securities or commodities where that guarantee is issued by a recognized exchange which holds the rights to the securities or commodities...

"Also key to the story is that the definition also incorrectly suggested repos could be collateralized by pledge as well as title transfer.

"First, there is no such thing as a repo backed by guarantee. The reason that the EC invented it seems to be that a Spanish-speaker in the meeting used the word ‘garantia', presumably when referring to the word ‘pledge' that got into the definition. Garantia means ‘security' as in ‘pledge'.

"The translator would seem to have picked up the word ‘garantia' and translated it literally as guarantee and a eurocrat popped it into the definition. There is circumstantial evidence that this is the case in the fact that pledged collateral is held in a blocked account by the settlement system (which is presumably what is meant by exchange).

"What a way to run a railroad, as Daffy Duck said," Comotto finishes by saying.





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"Would you be interested in a funny story about the SFTR (Securities Financing Transaction Regulation)?" asks Richard Comotto, Senior Visiting Fellow at ICMA Centre. He immediately launches into the said story without waiting for a reply.

"There aren't many. The EC (European Commission) has defined a repo but the definition is a disaster. I was told that it was the result of locking 28 lawyers in a room in Brussels with simultaneous translators, neither group having much if any experience of repo, after they had failed to reach agreement.

"This is the definition: ‘repurchase transaction' means a transaction governed by an agreement by which a counterparty transfers securities, commodities, or guaranteed rights relating to title to securities or commodities where that guarantee is issued by a recognized exchange which holds the rights to the securities or commodities...

"Also key to the story is that the definition also incorrectly suggested repos could be collateralized by pledge as well as title transfer.

"First, there is no such thing as a repo backed by guarantee. The reason that the EC invented it seems to be that a Spanish-speaker in the meeting used the word ‘garantia', presumably when referring to the word ‘pledge' that got into the definition. Garantia means ‘security' as in ‘pledge'.

"The translator would seem to have picked up the word ‘garantia' and translated it literally as guarantee and a eurocrat popped it into the definition. There is circumstantial evidence that this is the case in the fact that pledged collateral is held in a blocked account by the settlement system (which is presumably what is meant by exchange).

"What a way to run a railroad, as Daffy Duck said," Comotto finishes by saying.



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