Although the regulation is in the offing, vendors are stepping up their game to offer reporting solutions. Lynn Strongin Dodds reports.
The long awaited European Securities and Markets Authority’s (ESMA) final edict on standards for implementing the Securities Financing Transactions Regulation (SFTR) elicited mixed reactions. On the one hand, there was relief that collateral reporting had been extended to value date plus one; but on the other, concerns still remain that the additional messaging fields required are too complex.
For example, many participants were irked and surprised that the concept of an execution timestamp as a data field was still included, given that under MiFID II, securities finance transactions are labelled as ‘non-price forming transactions’ in relation to best execution. The concession is that ESMA included a one-hour tolerance when subject to reconciliation.
The final standards also shed light on the use of ISO 20022 methodology for reporting, validation and access to data as well as standardised identifiers such as Legal Entity Identifier (LEI), Unique Trade Identifier (UTI) and the International Securities Identification Number (ISIN). Moreover, access levels for different public authorities were defined, while the registration and extension of registration of trade repositories (TRs) were included.
The European Commission has until June 30th to give its seal of approval, but the hope is that implementation should begin by the end of this year. Market participants would have to start reporting their transactions to TRs 12 months after the publication in the Official Journal of the EU, and the reporting obligation will be phased in over nine months.
SFTR has many of the same objectives as the European Market Infrastructure Regulation (EMIR), in terms of greater transparency into transactions. It also entails dual-sided reporting, whereby both counterparties to a transaction report details of that trade. However, the scope is far broader and covers repurchase agreements (repos), securities lending and prime brokerage margin lending. The checklist of information to be reported is not just on the counterparty, details of the loan but also on the collateral component. This includes whether it is available for reuse or has been reused, the substitution of collateral at the end of the day, and the haircuts applied.
The task should not be underestimated and even ESMA has acknowledged that the number of reporting fields to be considered were disproportionately burdensome to many stakeholders. For example, in repo alone, over 70 data fields on each of their repo trades on a T+1 basis will need to be sent to an approved TR, which to date could be the Depository Trust & Clearing Corp (DTCC), KDPW, Regis-TR, UnaVista, CME Trade Repository and ICE Trade Vault Europe.
“Overall, I don’t think there has been any material change in terms of the scope and coverage in the final drafts, says Paul Wilson, head of agent lending at JP Morgan. “One of the biggest challenges is still the substantial amount of data that is required and the need to ensure that you are up to date if anything changes. Overall there are about 110 pieces of data that need to be provided and a substantial amount of the business that is transacted is across potentially hundreds of lenders. It will require structural changes to the way business gets transacted, potentially affecting tens of thousands of entities. This will be hugely helped by greater levels of cooperation between participants, who will need to work together to adhere to the requirements.”
Camille McKelvey, head of match strategy for Trax, also believes the contractual nature of the securities finance market and the lack of automation will also prove difficult. “The sell side has gotten used to transaction reporting under different regulations, but this is the first time that the buy side will have to report SFTs to such a level of granularity,” she says. “One of the problems is that this market still operates with many manual processes, and because of the contractual nature of the deals, there are issues over any changes that occur in price, spread, rate or collateral. The market will need to confirm all of this as well as report it.”
Compounding matters is the raft of additional legislation coming down the pipeline, particularly the Central Securities Depositary Regulation (CSDR) to be implemented in two years’ time, and MiFID II which comes into effect in January 2018. The result is that attention has only now switched to overcoming the hurdles of the SFTR. “We have been looking into the industry’s level of preparedness because it is immersed in MiFID II, but over the past six to eight weeks we have seen people have nascent projects on the go,” says Hugh Daly, chief executive officer of Broadridge’s Message Automation business. “There are now early-stage initiatives moving forward, although not everyone is up to speed and overall the industry’s infrastructure is fragmented, so participants are hoping for an industry solution.”
As with many of the other financial reforms, the SFTR is forcing firms to compile and process information from their own disparate internal systems, outsource to a third-party provider, or combine forces to create a solution. The first step though, according to Wilson is that the industry should develop a common set of principles and operating guidelines such as standard protocols and data reporting standards that act as a baseline for all participants to work from. This could mean standardised protocols and data reporting standards.
Alexander Westphal, director, market practice and regulatory policy at International Capital Market Association (ICMA), also believes that “some lessons have been learnt from EMIR and in order to have a successful implementation of SFTR, participants need to collaborate with potential and existing vendors. We are beginning to see some solutions emerge and coalitions form but it is still early days.”
Initiatives, according to Westphal, include platforms for the automatic matching and affirmation of repo trades prior to reporting, as well as more comprehensive front-to-back solutions that help to enrich and complete reports based on static data sources. “I think automation will continue to be the main area of focus in repo, and we are seeing several vendors building their own concrete operation models and platforms,” he adds. “However, interoperability between the different solutions would be good so that participants can have one contact point.”
Securities finance service stalwart Equilend has already been working with industry bodies, clients, triparty agents and trade repositories to create an automated, consolidated, scalable solution that removes the necessity for manually intensive intervention, while earlier this year, IHS Markit, which has several data handling and management offerings, joined forces with Pirum Systems’ post-trade reconciliation capabilities to build a SFTR reporting solution by the end of this year.
Moreover, Trax and Triana, a provider of pre-trade risk and post-trade processing solutions, forged an alliance to offer the industry an interoperable repo matching service, while Message Automation, which was recently acquired by Broadridge and has a MiFID product offering, is also working on its own SFTR version. “We may also see a utility solution emerging but given the tight timescales and difficulty in creating consensus it may struggle to be ready in time,” says Daly. “The cost differential between a utility and vendor is not as compelling in reporting as it is in clearing as there are no capital or risk efficiencies, purely operating cost savings.”
McKelvey also believes there will be other products in the future. “There are a variety of vendors having conversations with some forming partnerships, and others are developing their own solutions independently,” she says. “The solutions will also vary from those that are all encompassing, while others will focus on a particular aspect.”
