With less than four months until the first phase of SFTR comes in effect, there are some big choices to be made by those in scope. Rasa Balsyte of CME Group Regulatory Reporting discusses
What is SFTR and what are businesses doing about it today?
As the April deadline for the first batch of businesses to comply with the Securities Financing Transactions Regulation (SFTR) creeps closer, increasing numbers of market participants are in the midst of preparations.
We have worked with a range of businesses already to perform the significant amounts of business-impact analysis and data-gap analysis that is required to comply with this piece of regulation.
SFTR is a European regulation that will introduce enhanced reporting requirements for a range of specialized market transactions that are all essentially ‘loan-like’ in nature.
The regulation establishes a reporting framework for all repo transactions, lending and borrowing of securities or commodities, margin lending transactions and buy-sell or sell/buy-back agreements.
The increased transparency the new rules will create is expected to deliver greater fairness in the market and will better support analytics in trading. But to meet the impending deadlines, firms in scope should not delay the preparations further. These include gathering, aggregating, standardizing, enriching and verifying data for securities financing transactions (SFTs).
Firms then need to select the right reporting services. For sell-side as well as buy-side firms, partnering with an experienced and knowledgeable regulatory reporting provider to serve their needs will be a crucial decision.
What are the first steps towards getting ready?
One of the core elements of getting SFTR-ready is making sure that your compliance, operations and technology implementation staff fully understand the regulation and its ramifications.
As such, we have seen a sharp rise in demand for client training on the subject. Each investment firm in the market has its own product approach and structure and as such many of our clients have requested bespoke training that is highly tailored to their needs.
One important aspect of SFTR is the staggered nature of the deadlines for compliance depending on what type of business you are operating. Before doing anything else, firms are planning in accordance to the deadlines that will affect them (see Figure 1):
Credit institution, investments firms, central counterparties, central securities depositories and other buy-side firms all need to have reporting mechanisms in place in 2020. It is important that all firms ensure their house is in order as they speak with service providers to better understand what levels of support they might need and the level of access to the trade reports issued to repositories if they take the delegated-reporting approach. For example, a fund manager will need to ensure they have the right controls if the prime broker they are trading with does not give them access to the reports themselves.
Getting into the weeds – what comes next?
We are observing clients performing extensive analysis on the regulatory guidance itself, particularly the regulation’s draft schema and validation rules.
SFTR contains 153 data fields that will have to be supplied for SFTs.
Most businesses that we meet are anchoring their efforts around the data gap analysis and sourcing the correct data fields. For mid-tier and smaller firms, with lesser regulatory resources, reporting so many fields may be daunting.
Another challenge that clients are raising is the generation of unique trade identifiers (UTI). There is no centralized mechanism for generating a UTI code every time an SFT is set up, and currently the obligation lies with venues to provide them.
Later, the UTIs used by both legs of a transaction will be required to match and this presents a challenge somewhat like the ISIN issue that had to be addressed in the implementation of the Markets in Financial Instruments Regulation (MiFIR). Back-loading questions for repos with various maturities also poses an additional challenge.
Partnering with the right reporting software vendor
Firms are performing gap analysis to better understand the data they have and to consider vendors who may help.
Working with the right partner should start at the point of data analysis. If a service provider can help its client to understand the data they have, in the context of their requirements, and to understand where differences lie, the weight of SFTR becomes a lot lighter.
Ideally, a trusted reporting partner will be able to provide domain experts who can work directly with their clients, advising on the shortcomings of the data and how that data quality can be improved to meet requirements.
Working with your vendor partner under a modular ‘step-by-step’ approach is likely to be useful, to determine the scope of the program required before committing to the program.
Help may be sourced for the gap analysis of data, for the construction of the test file, iterating the data file to comply with the final validation rules set out by the European Securities and Markets Authority. The vendor may also help with any stress testing and running through a validation rules engine to assess readiness. All these aspects may be needed in full or in part based on the firm’s own capabilities and resources.
Flexibility is a paramount consideration to optimize the in-house resources and limit operational, technology and compliance risks inherent to the process while ensuring successful go-live ahead of the deadline.
Our three top-tips for success
The CME Group Regulatory Reporting SFTR Readiness Program provides clients with a modular program of activity tailored to your business needs.
As part of our Readiness Program we will be hosting educational events for market participants. These events will be attended by Richard Comotto, an advisor to the International Capital Market Association and author of ‘Repo Best Practice Trading Guide’, who will lead discussions about the relevant regulatory text and requirements.
Meanwhile, our technology and product teams have been implementing a next-generation technology architecture to coincide with the introduction of SFTR. The next-generation SFTR hub is built on a micro-services technology model, which provides benefits including more scalable data management, interrogation, compression and archiving.
Our core SFTR product is now available for client testing and we are trade repository agnostic.
For clients preparing for SFTR implementation, our top tips are:
Don’t leave it until the last minute. Clients tend to benefit from early testing and data cleansing preparation.
Clients benefit in the long term when they manage each new regime as a dedicated project. There are efficiencies to be gained from using the same vendor for the European Markets Infrastructure Regulation (EMIR) and/or MiFIR.
Have a dedicated project manager or business analyst that works closely with the reporting provider to provide greater control over the implementation process. While SFTR may resemble the original EMIR regime, it is of a very different nature and contains a significant number of new data fields.
Work closely with a provider to work out where you need help, and where you can do the work yourselves. SFTR requires you to understand your reporting requirements and ensure the correct data is submitted in the right format, therefore preparation now is key.
This article originally appeared in Securities Lending Times Issue 244 on January 21st 2020.