New SFTR Validation Rules – Same Old Challenges

Looking back on the first year of SFTR, we’ve highlighted the ineffectiveness of the validations and the trade repository (TR) reconciliations as a means of ensuring data quality. Given the global nature of SFT markets and post-Brexit in particular, the vast majority of transactions are simply non-reconciled by the TRs. According to DTCC, just 24% of EU SFTR reports are eligible for the TR reconciliation (dropping to 14% in the UK).

The recently released new schemas and validation rules (due to come into force on 31st January 2022) were a real opportunity to provide the clarity the industry craves and have a material impact on data quality. Unfortunately, the published changes are minor and will result in very limited improvement without significant further guidance / Q&As.

Why is data quality so bad?

When entering into data quality discussions, we are in effect doing the regulators’ bidding for them. The two greatest stumbling blocks we face are:

1) A significant lack of clarity around the rules, particularly in relation to security & collateral classification fields where far more explicit definitions and specifications are required (or else they should be removed)

2) The need for more explicit, official acknowledgement that no field is truly optional (or better still making all optional fields conditional). For example, why are CSD participant, branch of reporting/other counterparty, triparty agent, broker, beneficiary, agent lender, earliest call-back date, adjusted rate, price currency, market value, floating rate parameters, currency of collateral nominal amount and price currency not conditional? Clearly, the regulators’ intention was to extract this data if it were applicable to the transaction or event, so why do they not stamp their authority on this?   

So, what are the changes?

The changes themselves amount to more granular counterparty data being required across more action types and a number of clarifications around the loan and collateral data fields.

The most sensible of these include:

  • UTIs becoming mandatory for margin loan collateral updates,
  • Clarification that issuer LEIs must not be branch LEIs,
  • Individually cash collateralised securities lending trades must either have fixed or floating rebate rates
  • The value date of collateral becoming optional for collateral updates and corrections
  • Commodities have been ruled out as securities lending collateral
  • Further clarification has been given that action types termination (ETRM) and position component (POSC) can only be reported once for a given UTI and pair of counterparties.

Pain and expense for market participants

One loophole being closed for repo is that previously the type of collateral component was effectively optional on new reports and consequently parties were reporting repo loans without any collateral detail whatsoever (even single piece of collateral repos where the collateral was known at point of execution). Repos are effectively driven by the underlying collateral. However, this same change to securities lending (loan driven) has caused some consternation where parties must either report the type of collateral or a collateral basket identifier for collateralised SL trades. The workaround is likely to be the routine reporting of not available (NTAV) collateral baskets in relation to SL transactions. This will cause pain and expense for market participants while adding no additional information to reports.

A missed opportunity

In conclusion, this is a significant opportunity missed. Data quality is poor and a continual focus on tweaking validation rules (and associated schema) will do very little to tackle this. Measures to mandate regulatory testing, quality assurance controls and reconciliation (as per MiFIR) would have a far greater impact on ensuring regulatory submissions are fit for the dual purposes of identifying macro systemic risk and market manipulation.  

The new schemas and validation rules are available on ESMA’s website.

  • For a conversation with Jonathan about your SFTR Reporting or a no-obligation review of the quality of your reporting, please contact us.