While not an exhaustive list, here are our key takeaways from reading the ESMA SFTR Guidelines consultation responses. The overall level of engagement in relation to the consultation was substantial, with 49 files published by ESMA following the consultation period.
1. Reporting certainty
A few fundamental questions are key to providing clarity to support a timely build for SFTR reporting. Banks and credit institutions (due to report from April 2020) need answers to some of the these questions well in advance of the self-imposed Q4 2019 deadline set by ESMA.
In particular, question 25, whether to provide full reports or the delta of changes for modifications and corrections – respondents overwhelming voted for full reporting.
2. Reportability of intraday market infrastructures executed SFTs
Which intraday transactions executed on behalf of firms by CSDs and CCPs remain in-scope for reporting? While T2S Auto-collateralisation transactions are explicitly excluded from reporting, does this also cover UK Crest Auto-collateralised repos? Extracting and reporting this data presents unique challenges.
3. Scope and third country considerations
The approach to determining the ‘conclusion’ of a transaction by a branch is far reaching and strays from the EMIR definition. It appears to focus on the activities of individuals rather than risk held in the EU. The practical challenges of reporting SFT activities of non-EU entities where traders are supervised by EU branches are immense and likely to lead to significant confusion in relation to areas such as bilateral margining and reuse.
Concerns were raised where SFTR does not require non-EU AIFs managed by EU AIFMs to be reported (unlike EMIR), while EU AIFs must be reported regardless of whether the AIFM is based in the EU (again unlike EMIR).
4. Why are buy-sell backs still treated differently?
ESMA have specified that documented buy-sell backs should be reported as buy-sell backs listing the master agreement, but it is still unclear why the reporting requirements differ from repo. The inability to apply a repo rate, forward breakeven yield or forward price on a buy-sell back is a particular issue.
5. Is fails reporting really required?
There has been some confusion about the reporting of settlement fails (general consensus was that perfect settlement would be assumed unless both parties chose to modify a transaction to reflect a default or extended fail).
6. How to report bilateral variation margining
Concerns continue to surround the reporting of bilateral variation margins for repo. Given these margin calls at the counterparty portfolio level are entirely separate from the trade level collateral, there should be a separate end of day collateral update report to reflect bilateral margining. They cannot, as ESMA examples suggest, be incorporated with trade level collateral updates.
7. Failure to transmit Unique Trade Identifiers (UTI)
The issue of what to do if a counterparty is responsible for providing the UTI fails to provide it in a timely manner for reporting, remains an open question. The real question is how the party subject to late notification of the UTI by their counterparty can be excused from their obligation to submit timely reports.
8. Availability & consistency of reportable data
There are many concerns about the availability of data for reporting. The FSB themselves highlighted in their May 2019 document Thematic Review on Implementation of the Legal Entity Identifier that on aggregate only 55% of all financial instruments in scope have an LEI code (representing 78% of outstanding amounts) and that only 11% of all firms that are issuing securities have so far obtained an LEI. Mandating usage of issuer LEIs when firms that use securities as collateral have no contractual relationship with the issuer of the securities, appears a step too far. Solutions are to make the field conditional or apply a standard dummy issuer LEI.
Other concerns persist around missing official CFI codes, ISIN codes, differences in credit rating assessments between firms and the collateral type field.
9. The removal of ESCB transactions from the calculation
Trade associations reiterated that removing ESCB transactions from both sides of estimated re-use calculations will be both difficult and misleading. Nonetheless, this is understood to be an FSB requirement rather than ESMA specific.
10. Uncertainly around in-scope commodities financing transactions
A number of trade associations and other respondents commented on the significant uncertainty felt by the commodities trading industry around the SFTR reporting scope of any of their transactions. Concerns were raised that while commodities financing transactions share attributes with SFTs, they are not executed for financing purposes. Disagreement exists as to which transactions constitute repos and which buy-sell backs, in general they were deemed hard to define under existing SFT definitions. There are also concerns that certain commodity transactions, believed to best fit the repo definition use pledge arrangements and not title transfer. Some power and gas contracts may also be reportable under SFTR as well as REMIT. While exclusions are in place for EMIR, they are not in place for REMIT.
Did you know Jonathan provides CPD-accredited, CISI-endorsed training on the SFTR reporting requirements? Book your place on one of our upcoming courses here or get in touch for bespoke, in-house training.