SFTR Could Cost More To Implement Than Emir
The budget required to comply with the increased reporting requirements of the incoming Securities Financing Transactions Regulation may be larger than the costs of implementing Emir, the European Union regulation which introduced new reporting requirements for derivatives in 2014.
Last month the European Commission adopted SFTR, which requires all securities financing transactions including repurchase agreements, securities lending and margin lending trades to be reported to a trade repository the day after a trade. This should allow supervisors to monitor market developments, such as the build-up of leverage in the financial system. Reporting consists of approximately 150 fields and is slated to be phased in from the second quarter of 2020.
Alan McIntyre, senior business analyst and industry relations lead (Europe), at RegTek Solutions, which provides regulatory reporting software, told Markets Media that regulators have adopted the same framework for SFTR as Emir, which also required certain derivatives transactions to be reported to trade repositories. However, he warned that SFTR covers new products and trading desks and the securities financing market is far less technologically advanced than derivatives.
“Emir gathered together the data that firms already had internally, but a lot of SFTR data is not there at all so processes will have to be re-engineered,” said McIntyre.
In addition, SFTR also requires double-sided reporting from both counterparties to a trade so these will have to be reconciled.
RegTek has estimated that 40% of the data required for SFTR is not currently being generated. For example, legal information in master agreements has not had to be reported. In addition, there is a backloading requirement so the data has to applied to old trades, as well as new transactions.
“Firms will need a similar-sized budget to Emir, if not more, as a lot of data not available,” added McIntyre. “SFTR projects should be up and running now as implementation is a mammoth task.”
Another pain point will be requirement to generate and distribute unique trade identifier for each transaction, even though a standard format for UTI codes has not been agreed.
“UTIs have to be correct on submitted trade reports,” said McIntyre. “Esma has explicitly disallowed the use pseudo-UTIs and subsequent corrections in order to get cleaner data.”
Last year RegTek launched Validate.Trade for SFTR to allow firms to validate their data ahead of implementation. The firm said more than 700 rules specific to SFTR, as prescribed within the European Securities and Markets Authorities’ regulatory technical standards, are included in the platform.
McIntyre said: “Reg.Tek is venue-agnostic so can report to any trade repository and SFTR mandates the messaging standards.”
He continued that the regulation will bring some benefits such as improved better data quality and collateral management.
“The industry will look at the data and workflow processes, and will become more automated and efficient,” said McIntyre.
Tom Harry, regulatory specialist at London Stock Exchange’s electronic fixed income trading platform MTS Markets, agreed in a report that SFTR presents an opportunity to improve the efficiency of trading workflows in the repo market.
The SFTR reporting regime presents an opportunity to the repo market to improve the efficiency of trading workflows. Electronic trading frees up time to focus on trading. Read more in this comprehensive Q&A with regulatory specialist Tom Harry: https://t.co/ttJsOfkUhU pic.twitter.com/J9nO7wAcxg
— MTS Markets (@MTSMarkets) January 14, 2019
He added that electronic trading could eliminate the need to book trades manually.
“Shifting flow away from fragmented manual channels such as phone, chat and email and onto an electronic platform not only delivers the benefit of full straight through processing connectivity to trade repositories and third parties, but also ensures trade data is fully standardised and consistent across both counterparties,” said Harry.
Harry continued that most repo market participants are aware of SFTR, which he described as “MiFID II for repo.”
“The reportable fields extend well beyond trade economics. Significant effort will be required to create and to maintain extensive counterparty, collateral and even stakeholder reference data,” added Harry. “Attempting to capture the data required for this many fields and to submit accurate and complete reports by close of business the following day will present a real challenge for firms, across multiple workflows with little or no standardisation.”
The Depository Trust & Clearing Corporation intends to submit an application to become a registered SFTR trade repository when the application process has been detailed by Esma.
Val Wotton, managing director, product development & strategy, derivatives & collateral management at DTCC, said in a statement when the regulation was approved that in order to be ready the securities financing industry has a significant amount of work to do, particularly around data availability and workflows.
“Further, as market participants start to prepare, we urge them to take a more strategic approach to addressing the SFTR requirements, rather than viewing them as a compliance exercise,” added Wotton. “In doing so, they will have an opportunity to gain wider advantages such as increased levels of pre-trade matching, reducing trade fails and creating greater collateral efficiencies, which will result in significant benefits such as balance sheet optimisation.”
Transaction reporting for securities financing trades may create five times as many reports as trades under SFTR according to a paper from the DTCC and its consultancy partner, The Field Effect.
Last year the DTCC also said it would collaborate with other firms in the SFTR industry – EquiLend & Trax and IHS Markit & Pirum – so mutual clients have greater levels of straight through processing and can link to their existing technology to help implement the regulations more quickly and cost effectively. Each of the firms will build to DTCC’s global trade repository and enrich data to SFTR reporting standards.
EquiLend & Trax will connect to GTR via Trax’s reporting hub for all SFTR-eligible asset classes.
Chris Smith, head of Trax, said in a statement: “Given the complexities and manual nature in the securities financing trade lifecycle, key industry platforms must come together to provide holistic solutions. On behalf of EquiLend and Trax, we are excited to partner with DTCC to help mutual clients with their new regulatory obligations under SFTR.”
IHS Markit and Pirum’s fully integrated service offering will also connect to GTR via IHS Markit, providing data management and reconciliation capabilities and covering all SFTR reportable transactions.
Rajen Sheth, chief executive of Pirum, said in a statement: “It has been clear that the service provider community needs to work collaboratively to deliver an effective solution for SFTR. This collaboration with DTCC extends that network to provide real value to mutual clients.”
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