In a recent SFTR Implementation Survey conducted by Cappitech and analysed by Kaizen Reporting, revealed a lack of readiness among some survey participants in completing implementation for Securities Financing Transactions Regulation (SFTR). In a quick Q&A, with Ronen Kertis, CEO Cappitech, we explore some of the reasons for the lack of preparation including major stumbling blocks firms face ahead of the April 2020 deadline.
Q. What are the reasons for this lack of readiness?
A. There are a number of reasons for lack of readiness including:
1. Many Trade Repositories (TRs) have only just begun user acceptance testing or offer partial pre-user acceptance testing (UAT) and haven’t formally set their pricing yet. As a result, more than 40 percent of respondents still haven’t decided which TR they are intending to use. This has impacted the building of SFTR solutions for many. While, DTCC was one of the first TRs to offer user testing for example, it will be interesting where the remaining 40% decide to report to.
2. UAT testing has not been fully embraced by the industry and many regulatory programme deliveries have been delayed, leaving minimal time for testing.
3. While many financial companies are trying to get up to speed with their SFTR knowledge and implementation, there is still a knowledge gap and some of these unanswered questions from the regulator need to be clarified to fill some of the gaps.
4. A final point worth noting is that some of our respondents were in the asset management space which has a later implementation date. It’s also true that while firms might not be ready to test, nearly 60% with SFTR reporting requirements are actively considering how to extend and enhance their existing reporting services, whether handled in house or via a vendor. And most plan to implement lessons learnt during other regulatory implementation processes such as the Markets in Financial Instruments Directive (MiFID) and European Market Infrastructure Regulation (EMIR).
Q. What are the consequences of missing the deadline?
A. There are many potential consequences which may be imposed by Member States to introduce effective, proportionate and dissuasive administrative sanctions for infringement of Reporting Obligation such as:
o Cease and desist orders
o Withdrawal of authorisation
o Public censure
o Ban on management functions
o Fines (legal persons) – minimum €5m fine up to 10% of annual turnover, but can be more (up to 3x profits gained/losses avoided (if greater))
• Member States can apply criminal sanctions (must notify the European Securities and Markets Authority (ESMA) within 18 months of SFTR coming into force)
Q. Looking at readiness, where should firms be at this stage ahead of the 2020 deadline?
A. Those who need to be live 4/2020 should be in a state where they know their solution, partners, vendors and be at a state where they can commence testing in Q4.
Q. What are the main stumbling blocks impeding readiness?
A. There are a number of stumbling blocks for those impacted by SFTR. The main stumbling blocks are around counterparty Legal Entity Identifiers (LEIs), determining which trades are in scope, backloading, International Securities Identification Number (ISIN) and Issuer LEIs, understanding lifecycle events, reporting valuation and collateral changes, Defining reuse obligations and Unique Transaction Identifier (UTI) matching.
UTIs remain a key concern and the biggest issue for the market and while many are planning to use an external vendor to manage this effectively, it’s just the first step. SFTR is a complex regulation and firms impacted will need to consider the full gamut of requirements when considering how they will implement processes that will meet their and regulators’ needs.
Unlike with the implementation of EMIR, this time the regulator and the industry are taking the UTI matching much more seriously.
Data issues to consider include how are securities financing transactions (SFTs) booked, the data is stored and valuations are updated? is data available to extract and does it contain the relevant data points needed for SFTR? are 3rd party solutions currently being used able to fill in data gaps? do people have product identifiers such as ISINs and LEIs? how is UTI information shared with counterparties? how are valuation updates managed?
Q. How many firms are planning on delegated reporting and what are the challenges inherent in this plan?
A. 51% of the banks surveyed are committed to providing delegated reporting, although we believe this may be higher as larger banks will be compelled to offer it for commercial reasons. Delegated reporting brings real challenges, not least of which is the need for clients to have control of and access to their reporting data to meet their regulatory requirements. Specific delegated reporting solutions are available to solve this challenge for banks when they offer delegated or assisted reporting to their clients.
Q. For those late starters, will they be able to make the deadline if they start to make strides now? If so, what would you suggest these firms do now to get going?
A. Reporting firms who aren’t ready, especially those that haven’t started planning, will need to prioritise this in the coming weeks. SFTR is a detailed and complex transaction reporting regime because it includes data aggregation, validation, enrichment, normalisation, reconciliation and UTI sharing so firms looking to expand existing regulatory reporting relationships will need to ensure their full requirements are covered. Automation is a particular challenge, and requires specialized technology and regulatory expertise to meet the SFTR requirements. Where possible, an extension of their existing technology or using a vendor may provide an easier and more seamless transition.