SFTR reporting is now two years old for banks and investment firms and after a challenging gestation period and turbulent infancy, it’s toddling along with growing maturity.
Nobody involved is ever likely to forget the scale of the challenge to go-live in the epicentre of a global pandemic. Nor, the market fragmentation and change involved in implementing Brexit before SFTR had begun to find its feet. Just as we were looking ahead to a thorough regulatory review and ultimately SFTR Refit, war in Ukraine really placed a spanner in the works of the EU legislative process and has likely set us back a couple of years.
Data quality issues
Given the current state of the EU regulatory agenda, the onus has fallen upon the National Competent Authorities (NCAs) to be the principle guardians of reporting data quality. The EMIR & SFTR Data Quality Report 2021 perhaps set the tone in April this year, with glaring reporting misdemeanours highlighted (notably one major party reported a lot of open term business but failed to ever report a close!). Since then, it has become apparent that identifying data quality issues, under-reporting in particular, has been akin to shooting fish in a barrel for some of the NCAs.
Reporting quality is improving, particularly among our clients, even if in some cases it has required something of a regulatory stick from the most proactive NCAs. Demand for back reporting (correcting historic errors and adding under-reported activities) and assistance with back reporting is growing fast.
If any further prompts were necessary, here is a summary of the findings from 24 months of ReportShield™ Accuracy Testing for SFTR:
Reference and static data challenges
Many issues continue to present themselves, particularly in the realm of reference and static data and in particular in relation to fields that have no function within the trade lifecycle or settlement function. The decision to include fields that are not recorded in risk management systems or trade books and records has been highly questionable from the beginning. The concept that clients should agree the most appropriate field populations amongst themselves is also deeply flawed. There are also significant elements of uncertainty about how they should be populated (in some instances with multiple permissible answers). In particular, security/collateral type, credit quality, master agreements, jurisdiction of issuers, security maturity dates and CFI codes all present ongoing challenges.
Trade economics woes
In terms of the economics, the picture is not entirely rosy either, much to regulators’ anguish as spurious data is compounded by aggregation in the public data and potentially globally shared SFT data too. Many of the issues relate to incorrect interpretation, application of the rules, poor reporting logic or under-reporting (notably of collateral and valuations). The good news here (and the beauty of independent Accuracy Testing) is that once identified, these issues can often be quashed for good with relatively simple reporting logic changes (rather than the relentless and ongoing battle with reference data). We continue to witness instances of missing direction of collateral, significantly overstated haircuts (where initial margins have been used in error), incorrect pricing (prices & rates) and incorrect rate indices among other issues. Some of these issues are compounded by late reporting or misleading report timing (given the lack of effective data under SFTR).
How to cope with the early years?
Like caring for small children, there is no shame in calling for help! Not marking your own homework and an independent assessment of your ‘child’s’ performance gives great perspective. If you’d like some help in dealing with those sleepless nights, please contact us.
Jonathan is delivering an SFTR Core Training Course on 14-15 September. For more details or to book your place please visit our training pages.