Brown Brothers Harriman, the US private bank, warned that asset managers should not underestimate the requirements to comply with the new reporting requirements for securities financing transactions.

The firm’s 2017 Regulatory Field Guide said that in order to increase transparency into market-based financing activities, often referred to as “shadow banking,” the European Union is implementing the Securities Financing Transactions Regulation this year. SFTR covers activities such as securities lending, repurchase and reverse repurchase agreements (repos), and any sell/buy-back transactions involving securities or commodities. The proposed regulations are similar to Emir which introduced mandatory reporting for derivative transactions in the EU.

Garrett Berkery, global head of risk management for the securities lending and currency administration products at BBH, said in the report: “Many industry participants struggled with the Emir implementation and it is hoped that lessons learned will lead to a smoother implementation for SFTR. As with Emir, responsibility for satisfying the requirements of the regulation rests with the principals to the transactions, e.g. principal lender and principal borrower in a securities lending or repo transaction.”

SFTR is being implemented in phases, with the first requirements taking force this month on 12 January when Ucits and alternative investment funds were required to start disclosing data around securities financing transactions in all fund financial statements. In June, asset managers will be required to disclose their permitted securities financing trading activity in their fund prospectuses.

“While most asset managers have begun preparations for these requirements, SFTR’s most significant and complex phase begins with the implementation of Article 4,” added Berkery. “Expected to occur in the first quarter of 2018, this phase introduces the mandatory reporting of individual securities financing transactions.”

After the implementation of article 4, all securities financing transactions must be reported to an EU-registered trade repository within one working day and like Emir, they have to be reported separately by both parties.

The European Securities and Markets Authority is due to release its final technical specifications in this quarter. Berkery added that the industry will have one year from this date to comply, making March 2018 the probable start date.

He continued that based on the draft technical specifications, the fields that need to be reported are expansive and not all necessary data is readily available at the transaction level.

“For example, the jurisdiction and type of legal contract governing the transaction is not data typically stored at transaction level but must be reported per transaction under the new rules starting in 2018,” said Berkery. “The draft technical specifications also require that approximately 60 data fields be matched within very tight, or zero, tolerances. This is approximately six times the number of fields required to match under Emir.”

For example, he said the need to report changes to collateralization throughout the life cycle of the securities financing transaction, and agreement between counterparties on unique transaction identifiers will be onerous and complex. In addition Esma has proposed that trade details must be retained for at least 10 years, which is generally longer than standard record retention requirements under other regulations.

Berkery added: “A unique aspect of the reporting requirements is that they apply to EU and third-country counterparties if the securities financing transaction is through an EU branch of that third country counterparty. For example, a stock loan between a Japanese pension fund and the London branch of a Swiss bank would be included in the scope of the regulation because one party to the trade is an EU branch even though neither the lender nor the borrower’s principal office is in the EU.”

Therefore counterparties to securities financing transaction need to develop solutions this year is order to meet the complex filing requirements through either building, buying or outsourcing.

“A year may appear to be enough time to finalize solutions but lessons learned from Emir suggest otherwise,” said Berkery. “It would be foolish to underestimate the technical and stakeholder coordination challenges inherent in satisfying a detailed, dual-sided, reporting regime such as SFTR.”