Background: Securities Financing Transactions Regulation (“SFTR”) is a European regulation aimed at mitigating the risk of shadow banking. SFT's have been identified as being one of the central causes of the financial crisis and during and post crisis, regulators have struggled with anticipating the risks associated with securities financing. This led to the introduction of a reporting requirement for these SFTs.

Transactions that are reportable under SFTR: Repurchase agreements (repos), stock loans, margin loans, sell/buy-back transactions and collateral management transactions.

Whom do SFTR reporting obligations apply to: Reporting obligations normally apply to all clients established in the EU with the exception of natural persons. They apply to:

• Financial counterparties ("FC"): include investment firms, credit institutions, insurance and reinsurance undertakings, UCITS and UCITS management companies, Alternative Investment Fund managed by an AIFM authorised under the Alternative Investment Fund Managers Directive ("AIFMD"), institutions for occupational retirement provision, central counterparties and central securities depositories.
• Non-Financial Counterparty ("NFC"): Undertakings established in the Union or in a third country that do not fall under the definition of financial counterparty.
• Small Non- Financial Counterparty ("NFC-"): A small non-financial counterparty is one which does not exceed the limits of at least two of three criteria: a balance sheet total of EUR 20m, net turnover of EUR 40m, and average number of 250 employees during the financial year. Under SFTR, small NFC's reporting obligations are automatically delegated to the financial counterparty with which they execute an SFT.

What must be reported?
The types of SFTs in scope of the requirements include:

Transaction level reporting:

• Securities and commodities lending / borrowing transactions
• Buy-sell backs / sell-buy backs
• Repo transactions

Position Level reporting:

• Margin lending

In-scope entities will be required to report details of an SFT which is in scope if that SFT:

• is concluded after the date on which the Regulatory Technical Standards apply to the entity
• has a remaining maturity of over 180 days on the date on which the RTS apply to the entity
• is an open / rolling transaction that has been outstanding for more than 180 days on the date on which the RTS apply to the entity

When must it be reported?
SFTR is a two-sided reporting requirement, with both collateral provider (borrower) and collateral receiver (lender) required to report their side of the SFT to an approved Trade Repository on trade date +1 (T+1).

All new SFTs, modifications of open SFT’s and terminations of existing SFTs must be reported daily. Collateral is reported on T+1 or value date +1 (S+1) dependent on the method of collateralisation used.

What do reports include?
Reporting will be done using a combination of 153 fields, depending on product and report type.

• 18 counterparty data fields - which includes information about the counterparty such as LEI and country of legal residence.
• 99 Transaction fields – which includes the loan and collateral data information on the type of SFT which has been involved in the transaction
• 20 Margin fields – which includes information on margin such as the portfolio code and currency.
• 18 Reuse fields – which includes cash reinvestment and funding source data

What must match between reports?
The SFTR reporting format includes 153 reportable fields, some of which must match between reports of the two counterparties. There will be two phases of the trade repositories’ reconciliation process, with the first phase consisting of 62 matching fields which are required for the initial SFTR implementation. A second phase, starting 2 years after the start of the reporting obligation, will contain another 34 fields which are required to match, bringing the total number of matching fields to 96.

In this context, it is particularly important that the globally unique transaction identifier - a UTI, be used and shared between the parties to the trade. The parties should agree who is to generate the UTI. If no such agreement is in place, the regulation describes a waterfall model for who would be the generating party. The generating party is obligated to share the UTI with the counterpart in an electronic format in a timely manner for both parties to be able to fulfil their T+1 reporting obligation.

INTERACTIVE BROKERS DELEGATED REPORTING SERVICE TO HELP MEET YOUR REPORTING OBLIGATIONS

FCs, NFCs and NFC-s must report details of their transactions to authorised Trade Repositories. This obligation can be discharged directly through a Trade Repository, or by delegating the operational aspects of reporting to the counterparty or a third party (who submits reports on their behalf).

As mentioned above, when executing an SFT with an FC, an NFC- does not have to submit relevant reports, as these are submitted by the FC on the NFC-‘s behalf.
However, NFC-s who do not execute SFTs with an FC are required to submit reports.
Depending on the different setups available, Interactive Brokers clients’ may not be executing an SFT with an FC, and therefore Interactive Brokers offers a delegated reporting service, to ensure its clients can report all SFTs they execute.

As mentioned above, SFTR reports submitted by the two counterparties of an SFT must contain the same UTI. To ensure this requirement is satisfied, Interactive Brokers suggests that all of its clients in scope delegate reporting to Interactive Brokers.
Interactive Brokers will take care of generating matching UTIs when submitting its own reports and those of its clients on whose behalf it submits reports.

Validating Explicit Permissions - The European Securities and Markets Authority (ESMA) have introduced a mandate whereby trade repositories need to confirm a delegated reporting agreement is in place between the two parties before accepting and sending on any reports to the regulator. Due to this, the Trade Repository that Interactive Brokers works with - Depository Trust and Clearing Corporation ("DTCC"), has introduced a process to collect this information. As a client of Interactive Brokers, if you opt for delegated reporting, this mandate will apply.

DTCC will collect this information by sending clients an email asking for confirmation from the client that they have delegated their SFTR reporting to Interactive Brokers. – This will be a one-time process for each client. Once confirmed, DTCC will accept the reports and send them onto the regulator.

Securities Financing Transactions: Currently, Interactive Brokers clients can execute two types of SFTs: margin lending and stock loans. SFTR also requires reporting information on funding sources and collateral reuse.

Trade repository Interactive Brokers use: Interactive Brokers (U.K.) Limited will use the services of Depository Trust and Clearing Corporation ("DTCC") Trade Repository.

Timetable to report to Trade repositories: The reporting start date is 13 July 2020:
July 2020: Report Phase 1 – July 13 2020 reporting go-live for banks, investment firms & Credit Institutions and CCPs & CSDs
Oct 2020: Report Phase 2 - Insurance, UCITS, AIF & Pensions
Jan 2021: Report phase 3 - Reporting go-live for Non-Financial Companies

THIS INFORMATION IS GUIDANCE FOR INTERACTIVE BROKERS CLEARED CUSTOMERS ONLY.
NOTE: THE INFORMATION ABOVE IS NOT INTENDED TO BE A COMPREHENSIVE OR EXHAUSTIVE NOR A DEFINITIVE INTERPRETATION OF THE REGULATION, BUT A SUMMARY OF ESMA'S SFTR REGULATION AND RESULTING TRADE REPOSITORY REPORTING OBLIGATIONS

Introduction

You can request IBKR Australia perform your Australian short position reporting obligations on your behalf.

What is a short position?

A short position arises where the quantity of an eligible product that you hold is less than the quantity of the eligible product that you have an obligation to deliver, such as when you engaged in short selling an ASX-listed security and borrowed securities from IBKR to cover your delivery obligation.

When do I have a reporting obligation?

Short sellers have an obligation to report certain short positions to the Australian Securities & Investments Commission (ASIC). Reporting on short positions that are below the thresholds set by ASIC is optional. A short position does not need to be reported to ASIC when:

• The value of the position is AUD 100,000 or less; and
• The position is 0.01% or less of the total quantity of securities or products on issue for that security or product.

Otherwise, the short position must be reported.

The following table provides a convenient summary of when a short position must be reported (“Reportable Short Position”):

What you need to know about short position reporting:

It is important that any clients trading or wishing to trade eligible products understand that they may have an obligation to report their Reportable Short Positions to ASIC daily.

This obligation applies to any short sellers with a Reportable Short Position under the rules whether inside or outside of Australia. By default, IBKR Australia does not report Reportable Short Positions on your behalf, so you must arrange for the reporting of your short positions (if required).

IBKR Australia, along with many third-party firms, can provide this service to you subject to applicable terms and conditions.

If you would like IBKR Australia to perform your short position reporting for eligible products held in your IBKR account, please enrol in the service via Client Portal. Currently, this service is offered at no additional cost to IBKR Australia clients.

Please note:

• If your account does not allow shorting of securities, there is no need to sign up for this service.
• IBKR Australia will only offer the option to report all short positions and not only your Reportable Short Positions.

If you enroll in the IBKR short position reporting service:

• You must not hold any other eligible products with any other bank, broker or custodian because our systems use the positions in your IBKR account to determine whether you have a reportable short position. We cannot accurately calculate your short position if you hold eligible positions elsewhere.
• You must ensure that the information you provide us is complete and accurate in all respects, as we are required to provide ASIC with certain personal information about you.
• The obligation to report your short positions is always yours and is not transferred to IBKR under any circumstance (i.e. IBKR does not become responsible for your short position reporting obligations);
• If, for any reason, we are unable to report your short positions to ASIC before the deadline or at all, we will endeavour to inform you as early as possible so that you can make alternative arrangements. However, we make no warranties that you will receive the notification prior to the reporting deadline.

How do I apply?

To apply, all you need to do is log in to your account via the Client Portal, navigate to the Settings > Account Settings menu, click on the “ASIC Short Position Reporting” icon and follow the prompts.

As part of this process, you will need a unique identifier. For Australian applicants, this can be your ACN or ARBN. For overseas clients this can be your SWIFT BIC. Alternatively, you may register with ASIC to obtain a unique identity code.

Upon electing IBKR Australia to perform this short position reporting obligation on your behalf, you must warrant that the reportable short positions held with IBKR Australia represent your entire portfolio in applicable Reportable Short Positions and acknowledge that IBKR Australia will rely on this representation and warranty in good faith on each occasion that it makes a short position report to ASIC on your behalf.

Where can I get more information?

Clients seeking more information on their short position reporting obligations should refer to the following resources:

• ASIC Regulatory Guide 196, which contains an overview of the applicable short selling rules and disclosure requirements.
• ASIC Info Sheet 98, which provides an overview of how to submit short position reports to ASIC via FIX and a list of vendors who may be able to assist you with your short position reporting obligations if you don’t elect to enrol in the IBKR short position reporting service.

Introduction

The European Union legislative act known as the Markets in Financial Instruments Directive, or MiFID, as amended by MiFID II, requires Interactive Brokers (U.K.) Limited (IBUK) to classify each Client according to their knowledge, experience and expertise: "Retail", "Professional" or "Eligible Counterparty".

In accordance with the Financial Conduct Authority rules, IBUK categorises most clients as Retail clients, providing them with a higher degree of protection.

Only those clients that are either regulated entities or funds managed by regulated fund managers, are categorised as Per Se Professional Clients.

Professional Clients are entitled to a lower degree of protection under the UK regulatory regimes than Retail Clients. This notice contains, for information purposes only, a summary of the protections that a Retail Client might lose if they are to be treated as a Professional Client.

1. Description of the nature and risks of packaged investments: A firm that offers an investment service with another service or product or as a condition of the same agreement with a Retail Client must: (i) inform Retail Clients if the risks resulting from the agreement are likely to be different from the risks associated with the components when taken separately; and (ii) provide Retail Clients with an adequate description of the different components of the agreement and the way in which its interaction modifies the risks. The above requirements do not apply in respect of Professional Clients. However, IBUK will not make such differentiation apart from the case specified under point 3 below.

2. Retail investor protection measures on the provision of Contracts for Differences (“CFDs”): The regulatory measures include: (i) Leverage limits on the opening of a position, which vary according to the volatility of the underlying; (ii) A margin close out rule on a per account basis that standardises the percentage of margin (at 50%of the minimum required margin) at which providers are required to close out one or more open CFDs; (iii) Negative balance protection on a per account basis;(iv) A restriction on the incentives offered to trade CFDs; and (v) A standardised risk warning, including the percentage of losses on a CFD provider’s Retail investor accounts. These measures do not apply in respect of Professional Clients.

3. Communication with clients, including financial promotions: A firm must ensure that its communications with all clients are, and remain, fair, clear and not misleading. However, the simplicity and frequency in which a firm may communicate with Professional Clients (about itself, its services and products, and its remuneration) may be different to the way in which the firm communicates with Retail Clients. Regulations relating to restrictions on, and the required contents of, direct offer financial promotions do not apply to promotions to Professional Clients and such promotions need not contain sufficient information for Professional Clients to make an informed assessment of the investment to which they relate. A firm’s obligations in respect of the level of details, medium and timing of the provision of information are different depending on whether the client is a Retailor Professional Client. The requirements to deliver certain product-specific documents, such as Key Information Documents (“KIDs”) for Packaged Retail and Insurance-based Investment Products (“PRIIPs”), are not applied to Professional Clients.

4. Depreciation in value reporting to clients: A firm that holds a Retail Client account that includes positions in leveraged financial instruments or contingent liability transactions must inform the Retail Client, where the initial value of each instrument depreciates by 10 per cent and thereafter at multiples of 10 per cent. The above reporting requirements do not apply in respect of Professional Clients (i.e., these reports do not have to be produced for Professional Clients).

5. Appropriateness: For transactions where a firm does not provide the client with investment advice or discretionary management services (such as an execution-only trade), it may be required to assess whether the transaction is appropriate. When assessing appropriateness for non-advised services, a firm may be required to determine whether the client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or service offered or demanded. Where such an appropriateness assessment requirement applies in respect of a Retail Client, there is a specified test for ascertaining whether the client has the requisite investment knowledge and experience to understand the risks associated with the relevant transaction. However, in respect of a Professional Client the firm is entitled to assume that a Professional Client has the necessary level of experience, knowledge and expertise in order to understand the risks involved in relation to those particular investment services or transactions, or types of transaction or product, for which the client is classified as a Professional Client. IBUK provides non-advised services and is not required to request information or adhere to the assessment procedures for a Professional Client when assessing the appropriateness of a given service or product as with a Retail Client, and IBUK may not be required to give warnings to the Professional Client if it cannot determine appropriateness with respect to a given service or product.

6. Information about costs and associated charges: A firm must provide clients with information on costs and associated charges for its services and/or products. The information provided may not be as comprehensive for Professional Clients as it must be for Retail Clients.

7. Dealing: When undertaking transactions for Retail Clients, the total consideration, representing the price of the financial instrument and the costs relating to execution, should be the overriding factor in any execution. For Professional Clients a range of factors may be considered in order to achieve best execution –price is an important factor, but the relative importance of other different factors, such as speed, costs and fees may vary. However, IBUK will not make such differentiation.

8. Difficulty in carrying out orders: In relation to order execution, firms must inform Retail Clients about any material difficulty relevant to the proper carrying out of orders promptly on becoming aware of the difficulty. This is not required in respect of Professional Clients. The timeframe for providing confirmation that an order has been carried out is more rigorous for Retail Clients’ orders than Professional Clients’ orders.

9. Share trading obligation: In respect of shares admitted to trading on a regulated market or traded on a trading venue, the firm may, in relation to the investments of Retail Clients, only arrange for such trades to be carried out on a regulated market, a multilateral trading facility, a systematic internaliser or a third-country trading venue. This is a restriction which may not apply in respect of trading carried out for Professional Clients (i.e., this restriction can be disapplied where trades in such shares are carried out for Professional Clients in certain circumstances).

10. Exclusion of liability: Firms’ ability to exclude or restrict any duty or liability owed to clients is narrower under the FCA rules in the case of Retail Clients than in respect of Professional Clients.

11. The Financial Services Ombudsman: The services of the Financial Ombudsman Service in the UK may not be avail-able to Professional Clients, unless they are, for example, consumers, small businesses or individuals acting outside of their trade, business, craft or profession.

12. Compensation: IBUK is a member of the UK Financial Services Compensation Scheme. You may be entitled to claim compensation from that scheme if IBUK cannot meet its obligations to you. This will depend on the type of business and the circumstances of the claim; compensation is only available for certain types of claimants and claims in respect of certain types of business. Eligibility for compensation from the Financial Services Compensation Scheme is not contingent on your categorisation but on how the firm is constituted. Eligibility for compensation from the scheme is determined under the rules applicable to the scheme (more information is available at https://www.fscs.org.uk/).

13. Transfer of financial collateral arrangements: As a Professional Client, the firm may conclude title transfer financial collateral arrangements with you for the purpose of securing or covering your present or future, actual or contingent or prospective obligations, which would not be possible for Retail Clients.

14. Client money: The requirements under the client money rules in the FCA Handbook (CASS) are more prescriptive and provide more protection in respect of Retail Clients than in respect of Professional Clients.

Re-categorisation as Professional Client

IBUK allows its Retail Clients to request to be re-categorised as Professional Clients. Clients are notified of their Client Category and can check it at any time from Account Management, under Settings> Account Settings> MiFID Client Category. From this same screen, Clients can also request to change their MiFID Category.

IBUK will consider re-categorising Retail Clients to Professional Clients in two instances:

1. Per Se Professional Clients can notify IBUK that they consider that they should have been categorised as Per Se Professionals under the FCA rules, because at least one of the following conditions applies:

(i) authorised or regulated to operate in the financial markets; or

(ii) a large undertaking meeting two of the following size requirements on a company basis:

(a) balance sheet total of EUR 20,000,000;
(b) net turnover of EUR 40,000,000;
(c) own funds of EUR 2,000,000;

(iii) an institutional investor whose main activity is to invest in financial instruments. This includes entities dedicated to the securitisation of assets or other financing transactions.

2. IBUK may treat Clients as Elective Professional Clients if, based on an assessment of the Client’s expertise, experience, and knowledge, IBUK is reasonably assured that, in light of the nature of the transactions or services envisaged, the Client is capable of making its own investment decisions and understand the risks involved. Clients who do not meet the requirements to be categorised as Per Se Professional Clients can still request to be categorised as Elective Professional Clients.

To obtain such re-categorisation, Retail Clients must provide evidence that they satisfy at least two (2) of the following criteria:

1. Over the last four (4) quarters, the Client conducted trades in financial instruments in significant size at an average frequency of ten (10) per quarter.

To determine the significant size IBUK considers the following:
   a. During the last four quarters, there were at least forty (40) trades; and
   b. During each of the last four (4) quarters, there was at least one (1) trade; and
   c. The total notional value of the top forty (40) trades of the last four (4) quarters is greater than EUR 200,000; and
   d. The account has a net asset value greater than EUR 50,000.

Trades in Spot FX and Unallocated OTC Metals are not considered for the purpose of this calculation.

2. The Client holds a portfolio of financial instruments (including cash) that exceeds EUR 500,000 (or equivalent);

3. The Client is an individual account holder or a trader of an organisation account who works or has worked in the financial sector for at least one year in a professional position which requires knowledge of products it trades in.

Upon review and verification of the information and supporting evidence provided, IBUK will re-categorise clients if all relevant conditions are met to satisfaction.

Retail Clients requesting to be re-categorised as Professional Accounts must read and understand the warning provided by IBUK before the relevant request is submitted.

Re-categorisation as Retail Client

Professional Clients can request IBUK to be re-categorised as Retail Clients, from the same Account Management page described above (under Settings> Account Settings> MiFID Client Category).

With the sole exception of regulated entities or funds managed by regulated fund managers, which are categorised as Per Se Professional Clients, IBUK accepts all such requests.

THIS INFORMATION IS GUIDANCE FOR INTERACTIVE BROKERS FULLY DISCLOSED CLEARED CUSTOMERS ONLY.
NOTE: THE INFORMATION ABOVE IS NOT INTENDED TO BE A COMPREHENSIVE, EXHAUSTIVE NOR A DEFINITIVE INTERPRETATION OF THE REGULATION, BUT A SUMMARY OF IBUK’S APPROACH TO CLIENT CATEGORISATION AND RE-CATEGORISATION POLICY.