In Part 2 of our introduction to SFTR, Jonathan Lee looks ahead at the implementation of the regulation and some of the data quality challenges firms need to be thinking about now.
STOP PRESS! The European Commission broke with protocol in publishing a letter sent to ESMA on 2 August (generally they do not publish in August), stating that they planned to endorse with amendments, the draft Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS). This gives ESMA a further six weeks to submit revised drafts that reflect these changes.
The changes whilst minor, are extensive. There are a large number of changes in semantics, providing further clarity through simpler language. The material changes relate to concerns that LEIs for branches and standards around UTIs may not be ready in time for go-live. Furthermore, they have incorporated industry feedback that agent lenders may be used on repo trades and that there needs to be a not-applicable option for termination optionality on repo and securities lending trades.
These amendments and the six weeks for ESMA to respond will introduce some additional delay to SFTR Article 4 reporting go-live. Nevertheless, we anticipate that the RTS will be published in the official journal of the European Union at the end of 2018 or early 2019 and that reporting will go-live for banks & investment firms in Q1 2020 with market infrastructures, fund managers and non-financial counterparties to follow at three month subsequent intervals.
A herculean task
Under SFTR, participants in the European securities financing markets will be required to provide daily reporting to a trade repository (TR) of not only every new trade, amendment, correction, error and cancelation but also the majority of lifecycle events, collateral valuations and legal entity wide collateral re-use statistics. This herculean reporting task will hand a legal obligation to all but the smallest non-financial counterparties to report between 61-128 fields (product dependent) across four reporting tables. Furthermore, reporting parties will be tasked with ensuring that between 36-48 of these fields can be matched between reporting parties (intra and inter trade repository) for ESMA to be able to interpret the data and the ESCB Datastore to be able to create the Europe wide data aggregations. We envisage that handling trade repository reconciliation queries on SFTR is set to become a significant and complex operational task post go-live.
Bringing together securities financing markets
Securities financing markets are currently more fragmented and disparate than many other markets currently subject to significant regulatory reporting regimes. There is generally less precedent, less market convention and less infrastructure in place than for many other markets. The regulation seeks implicitly to set about changing this. To put forward the repo market as an example, there are still many instances in which the functioning of the market is very settlements driven, there are many manual processes and any pre-settlement matching is limited in scope or subscription. SFTR will encourage many OTC telephone or messaging based trades to move onto venues. This would certainly help overcome many booking discrepancies, contractual and lifecycle handling differences between counterparties. It will also help in the creation of a common dataset to in turn be reported to the TRs.
Data sourcing will be painful
SFTR requires that reporting firms not only provide the common reporting standards (ISINs for collateral, LEIs for counterparties and collateral issuers, MIC codes for venues, CFI codes for collateral classification and unique trade identifiers (UTIs)) – with mandatory use of UTIs and branch LEIs potentially to be introduced later – but also much additional classification and derivation too. Many of the required fields are largely unfamiliar within this industry and will present data sourcing difficulties. Indeed, in many cases, firms will need to look beyond risk management, trading and settlement systems in order to source the data. Siloed securities financing businesses will also need to look beyond their own businesses to capture data across entire legal entities in order to meet requirements such as re-use reporting.
Less risk, greater transparency
ESMA and the European regulators have made it very clear that they require SFTR reports to be a true reflection of a firm’s books and records. They have provided very little sympathy for proposed pragmatic reporting solutions that ensure higher degrees of trade repository matching rates if this deviates from original trade bookings or fails to reflect fundamental business practice or booking discrepancies that the securities financing industry is experiencing. The regulators expect firms to be able to prove that they are continuing to evolve and improve both their booking and reporting practices to create an environment of less risk, greater efficiency and the greater transparency that comes from strengthening regulatory reporting compliance. The reporting deadline itself may prove something of a ‘Big Bang’ but ensuring that the controls and quality assurance framework continue to make evolutionary and iterative progress is not.
Data quality assurance should be part of SFTR plan
At Kaizen Reporting, we support trade association industry initiatives that encourage securities financing businesses to shape up in advance of SFTR go-live. We also support bilateral reconciliations to better understand firms’ and industry reporting issues and the creation of industry-wide best practice documents to encourage enhanced booking practices and behaviours. In addition, we would urge reporting parties to embark on the incorporation of trade level and reference data quality assurance within their project plans. Firms should look to perform both internal and external reconciliations to ensure reporting data is complete, accurate and uncorrupted by systems. Furthermore, applying Kaizen’s ReportShield™ to your post go-live plans will help tremendously in ensuring Senior Managers are kept abreast of reporting quality and reassuring the regulatory authorities of the firm’s level of diligence. Contact us for an initial conversation about getting ready for SFTR reporting.
Read Part 1: SFTR – if you can’t beat em, join em which focuses on the background and context of SFTR.