SFTR validation rules and schemas from the ESMA cauldron…

Halloween saw some new ghoulish delights appear from the ESMA cauldron with the publication of SFTR validation rules (revised following the summer consultation) and XML schemas for reporting. ESMA has released four documents covering:

SFTR report validation rules
Counterparty and Trade Repository (TR) data exchange XML schema
Intra-TR data exchange XML schema
TR to authority data exchange XML schema.

We have created a marked changes version of the latest validation rules to highlight the differences.

Tighter but more logical

The validation rules have been tightened up to reflect instances in which fields that business logic dictates should be mandatory or conditional are no longer optional. For example, the loan field ‘security quality’ is now conditional rather than optional for new securities lending transactions. In other instances, fields that were not rationally mandatory (e.g. ‘maturity {date} of the security’ fields for both loan and collateral) are now conditional. The rules generally make more sense, particularly in relation to the two changes noted below.

Full reporting – not delta reporting

Modifications and corrections at both trade and position level now require all of the original counterparty table fields to be populated. In most cases, they also require the same fields to be populated in the loan and collateral table as in the original NEWT report in accordance with the same mandatory and conditional rules as the original report. This requirement for full reporting of modifications and corrections should be clarified in the level three guidelines when published by ESMA later this quarter.

Bilateral Margining Simplified

The ‘counterparty side’ is no longer required for collateral updates, making bilateral margin reporting simpler. Since stating whether the reporting party is a collateral giver or collateral taker is no longer a pre-requisite of providing a bilateral margining collateral update (COLU) or any other COLU report, it is much more straightforward to report instances of collateral flowing in both directions with the same other counterparty.

The references to negative values of securities in the ‘counterparty side’ validation field notes on format and content have also been removed (in addition to this field being no longer required for COLU reports). Instead, the ‘collateral quantity or nominal amount’ is now permitted to be negative, enabling you to report collateral moves in either direction – as a margin giver or taker for example. You are also now permitted to use negative values in the ‘price per unit’ field. Again, we hope for further clarification when the reporting guidelines are released.

The publication of schemas, the cementing of validation rules and a number of key clarifications (as highlighted) puts the industry in a much greater state of readiness for reporting – now only five months away. Our advice? Don’t now wait for final reporting guidelines (due later in Q4) but focus full steam ahead on implementation, testing and establishing your controls environment. And if you’d like to discuss how we can ensure you are compliant with SFTR reporting rules, please don’t hesitate to contact us.