Wait and see is not an option
13 June 2017
Senior business analyst Gilbert Scherff and securities finance and collateral management marketing director Martin Seagroatt break down what will be required of SFTR and explain how Broadridge Financial Solutions can help
Image: Shutterstock
With the European Â鶹´«Ã½ and Markets Authority’s (ESMA) publication of the technical standards for Â鶹´«Ã½ Financing Transactions Regulation (SFTR) trade reporting, the starting gun has now been fired and the clock is ticking for firms to comply with the rules. By current estimates, the first phase of compliance will take place some time in 2018. This leaves a relatively short window for market participants to perform an impact analysis, define a target operating model, assign IT resources and make the required changes to systems and processes.
The sheer volume and granularity of data required for reporting represents a significant operational challenge for the securities finance markets. As a result, Broadridge is currently working in collaboration with clients, prospects and third-party vendors, utilities and industry associations to ensure a smooth onboarding process.
To support the rules, Broadridge will implement changes to the Broadridge (formerly 4sight) Â鶹´«Ã½ Finance and Collateral Management (SFCM) solution. We will also develop data extracts and interfaces for a range of downstream reporting and matching utilities to allow reporting directly to trade repositories.
In addition to this, Broadridge will offer a separate integrated solution for trade matching, unique trade identifier (UTI) generation, data enrichment and direct reporting. This leverages Broadridge’s experience in European Market Infrastructure Regulation (EMIR) reporting for derivatives and reporting under the second Markets in Financial Instruments Directive (MIFID II) through its recent purchase of Message Automation. This option provides clients with an end-to-end Broadridge solution to meet reporting requirements.
Broadridge will also enhance its current interfaces with Pirum and EquiLend’s post-trade reconciliation platforms to support the SFTR reporting capabilities. Customers therefore have the option of a unified Broadridge solution for all SFTR requirements, but with the option to be delivered on a modular basis and combined with other market solutions to meet customer preferences.
The picture that is emerging from an analysis of the technical standards is that:
• Timescales for compliance are relatively short
• The work required to comply is significant
• SFTR will require widespread changes to IT systems and integration points
• ESMA estimates that compliance will entail a major cost impact
• Firms need to act now rather than take a wait and see approach to ensure a smooth transition to the new operating environment
• Firms need to consider synergies with other reporting regimes and make decisions around data quality and consistency across reporting mandates
• As with EMIR, requirements may evolve, leading to a moving target around both scope interpretation and deadlines
• This article explores the IT impact of the rules. It outlines a checklist of steps firms should take to ensure readiness, reduce reputational risk and mitigate regulatory exposure. In the longer term, firms should also think about how they can use SFTR to obtain competitive advantage through a more strategic approach to the use of data.
Cost impact of SFTR
ESMA has provided some guidance by estimating costs for compliance for different types of firm detailed in the infographic included in this article, split into one-off costs and ongoing costs.
These estimates include:
• Data mapping
• Addition of new fields in IT systems
• Interfacing work
• Data cleansing and enrichment
Ongoing costs include IT and data storage costs plus ongoing maintenance. Other overheads include resourcing costs for data monitoring, auditing and error handling.
Costs will vary depending on:
• Extent of existing systems integration
• Whether systems are up to date
• Previous learning experience with EMIR reporting
• Size of firm
• Transaction volumes
The following checklist includes some other key items to think about.
Engage with your respective vendors as soon as possible
Due to the complexity of the regulation, engaging your vendors early in the process is of utmost importance. This helps to align your SFTR project plan with that of your vendors. Moreover, they can also help you understand what is required and what the (potential) impacts are on your business. This will ensure you will meet the applicable regulatory deadlines at minimum cost and with a high level of quality.
Vendors such as Broadridge can also help to reduce some of the operational headaches involved in compliance. The benefits of working with your vendors are significant as the solutions provided will be standardised and aligned with market practice. Furthermore, it will minimise the burden of analysing, implementing and (once live) maintaining the solution. In your strategic relationship with your vendor(s), there will be options to select both bundled and unbundled reporting solutions for the various stages of the process. This includes:
• Extracting data from systems for consumption by downstream reporting utilities
• UTI generation
• Data enrichment
• Trade matching
• Reporting to repositories
• Reconciliation
It is important to make decisions around the optimal mix of solutions based on your unique operational requirements.
Evaluate the lessons learned from EMIR reporting
Regulatory trade reporting to such an extent is new to the securities finance industry. However, the reporting of derivatives transactions for EMIR has provided a useful case study and lessons learned that we can apply to the SFTR initiative.
As experienced with the EMIR reporting requirements, many firms took a ‘wait and see’ approach, especially as the regulator kept pushing the deadline back.
Once a deadline was announced, this had a ‘big bang’ effect, resulting in many choosing potentially suboptimal tactical solutions. At the same time, the inflow of requests on the vendor/solutions provider side was significant, creating a deadlock in some circumstances.
Not being prepared will come at a cost but also can create a reputational risk, especially in the case of an agency lender in terms of relationships with both its underlying clients and the street.
Another lesson learnt from EMIR is not to underestimate the impact of a continuously changing landscape of reporting/regulatory requirements, combined with ongoing maintenance of (often) tactical solutions.
Many simply aimed to comply with the regulation at a basic level, however, tactical solutions often come at a high cost and potentially with continuity risk.
Decide whether to take a siloed versus a holistic approach with other reporting rules
The existing regulatory reporting solutions at your firm should be considered. Decisions need to be made about whether you are going to apply a siloed approach for SFTR or are going to leverage the various reporting streams you already manage (not only EMIR reporting but also, for example, Basel III, MIFID II/MiFIR and Solvency II).
It is important to question how this aligns with your further reporting requirements (both internal, client facing and regulatory) and how this links to data analytics.
Aim to achieve a strategic rather than a tactical solution
While SFTR presents a challenge for market participants, it also creates an opportunity for those that take a strategic approach to the standardisation of data and the transparency that improved data management brings.
In many ways, the new order is all about data and transforming it into clear, understandable, relevant information that allows measurement and analysis and supports decision making.
Before any optimisation of resource allocation can occur (for example, liquidity, capital and balance sheet), there must be consolidated, measurable data. Centralisation of information into a single data repository for the firm is a vital precursor to this.
At its recent annual conference, the International Swaps and Derivatives Association (ISDA) discussed the need for what it called a ‘common domain model’.
The derivatives market has undergone multiple sprints in recent years to comply with regulation and this has resulted in tactical solutions and a lack of standardisation.
ISDA is now looking to address this through a more strategic, efficient and standardised operating model.
The securities finance industry is still some way behind the derivatives markets in terms of regulatory timelines. However, in future our market should also be able to embark on this journey towards standardisation. This standard data model will open-up the potential for efficiency gains and in the future.
We could also see the application of artificial intelligence and machine learning to use this mass of data for competitive advantage and predictive analytics to gain a more forward looking view of market trends and risk.
SFTR is in this sense not limited to being a ‘burden’/’must do’ related to regulatory compliance but at the same time, an opportunity to move your firm forward and leverage efficient data handling.
Firms that view SFTR as an opportunity and take a strategic approach will minimise the costs and headaches of compliance and realise the efficiency gains increased data standardisation will bring.
EMIR has taught us that taking a wait and see approach is not a viable option. Now is the time to begin speaking with technology vendors such as Broadridge to define a blueprint for how your firm will comply.
The sheer volume and granularity of data required for reporting represents a significant operational challenge for the securities finance markets. As a result, Broadridge is currently working in collaboration with clients, prospects and third-party vendors, utilities and industry associations to ensure a smooth onboarding process.
To support the rules, Broadridge will implement changes to the Broadridge (formerly 4sight) Â鶹´«Ã½ Finance and Collateral Management (SFCM) solution. We will also develop data extracts and interfaces for a range of downstream reporting and matching utilities to allow reporting directly to trade repositories.
In addition to this, Broadridge will offer a separate integrated solution for trade matching, unique trade identifier (UTI) generation, data enrichment and direct reporting. This leverages Broadridge’s experience in European Market Infrastructure Regulation (EMIR) reporting for derivatives and reporting under the second Markets in Financial Instruments Directive (MIFID II) through its recent purchase of Message Automation. This option provides clients with an end-to-end Broadridge solution to meet reporting requirements.
Broadridge will also enhance its current interfaces with Pirum and EquiLend’s post-trade reconciliation platforms to support the SFTR reporting capabilities. Customers therefore have the option of a unified Broadridge solution for all SFTR requirements, but with the option to be delivered on a modular basis and combined with other market solutions to meet customer preferences.
The picture that is emerging from an analysis of the technical standards is that:
• Timescales for compliance are relatively short
• The work required to comply is significant
• SFTR will require widespread changes to IT systems and integration points
• ESMA estimates that compliance will entail a major cost impact
• Firms need to act now rather than take a wait and see approach to ensure a smooth transition to the new operating environment
• Firms need to consider synergies with other reporting regimes and make decisions around data quality and consistency across reporting mandates
• As with EMIR, requirements may evolve, leading to a moving target around both scope interpretation and deadlines
• This article explores the IT impact of the rules. It outlines a checklist of steps firms should take to ensure readiness, reduce reputational risk and mitigate regulatory exposure. In the longer term, firms should also think about how they can use SFTR to obtain competitive advantage through a more strategic approach to the use of data.
Cost impact of SFTR
ESMA has provided some guidance by estimating costs for compliance for different types of firm detailed in the infographic included in this article, split into one-off costs and ongoing costs.
These estimates include:
• Data mapping
• Addition of new fields in IT systems
• Interfacing work
• Data cleansing and enrichment
Ongoing costs include IT and data storage costs plus ongoing maintenance. Other overheads include resourcing costs for data monitoring, auditing and error handling.
Costs will vary depending on:
• Extent of existing systems integration
• Whether systems are up to date
• Previous learning experience with EMIR reporting
• Size of firm
• Transaction volumes
The following checklist includes some other key items to think about.
Engage with your respective vendors as soon as possible
Due to the complexity of the regulation, engaging your vendors early in the process is of utmost importance. This helps to align your SFTR project plan with that of your vendors. Moreover, they can also help you understand what is required and what the (potential) impacts are on your business. This will ensure you will meet the applicable regulatory deadlines at minimum cost and with a high level of quality.
Vendors such as Broadridge can also help to reduce some of the operational headaches involved in compliance. The benefits of working with your vendors are significant as the solutions provided will be standardised and aligned with market practice. Furthermore, it will minimise the burden of analysing, implementing and (once live) maintaining the solution. In your strategic relationship with your vendor(s), there will be options to select both bundled and unbundled reporting solutions for the various stages of the process. This includes:
• Extracting data from systems for consumption by downstream reporting utilities
• UTI generation
• Data enrichment
• Trade matching
• Reporting to repositories
• Reconciliation
It is important to make decisions around the optimal mix of solutions based on your unique operational requirements.
Evaluate the lessons learned from EMIR reporting
Regulatory trade reporting to such an extent is new to the securities finance industry. However, the reporting of derivatives transactions for EMIR has provided a useful case study and lessons learned that we can apply to the SFTR initiative.
As experienced with the EMIR reporting requirements, many firms took a ‘wait and see’ approach, especially as the regulator kept pushing the deadline back.
Once a deadline was announced, this had a ‘big bang’ effect, resulting in many choosing potentially suboptimal tactical solutions. At the same time, the inflow of requests on the vendor/solutions provider side was significant, creating a deadlock in some circumstances.
Not being prepared will come at a cost but also can create a reputational risk, especially in the case of an agency lender in terms of relationships with both its underlying clients and the street.
Another lesson learnt from EMIR is not to underestimate the impact of a continuously changing landscape of reporting/regulatory requirements, combined with ongoing maintenance of (often) tactical solutions.
Many simply aimed to comply with the regulation at a basic level, however, tactical solutions often come at a high cost and potentially with continuity risk.
Decide whether to take a siloed versus a holistic approach with other reporting rules
The existing regulatory reporting solutions at your firm should be considered. Decisions need to be made about whether you are going to apply a siloed approach for SFTR or are going to leverage the various reporting streams you already manage (not only EMIR reporting but also, for example, Basel III, MIFID II/MiFIR and Solvency II).
It is important to question how this aligns with your further reporting requirements (both internal, client facing and regulatory) and how this links to data analytics.
Aim to achieve a strategic rather than a tactical solution
While SFTR presents a challenge for market participants, it also creates an opportunity for those that take a strategic approach to the standardisation of data and the transparency that improved data management brings.
In many ways, the new order is all about data and transforming it into clear, understandable, relevant information that allows measurement and analysis and supports decision making.
Before any optimisation of resource allocation can occur (for example, liquidity, capital and balance sheet), there must be consolidated, measurable data. Centralisation of information into a single data repository for the firm is a vital precursor to this.
At its recent annual conference, the International Swaps and Derivatives Association (ISDA) discussed the need for what it called a ‘common domain model’.
The derivatives market has undergone multiple sprints in recent years to comply with regulation and this has resulted in tactical solutions and a lack of standardisation.
ISDA is now looking to address this through a more strategic, efficient and standardised operating model.
The securities finance industry is still some way behind the derivatives markets in terms of regulatory timelines. However, in future our market should also be able to embark on this journey towards standardisation. This standard data model will open-up the potential for efficiency gains and in the future.
We could also see the application of artificial intelligence and machine learning to use this mass of data for competitive advantage and predictive analytics to gain a more forward looking view of market trends and risk.
SFTR is in this sense not limited to being a ‘burden’/’must do’ related to regulatory compliance but at the same time, an opportunity to move your firm forward and leverage efficient data handling.
Firms that view SFTR as an opportunity and take a strategic approach will minimise the costs and headaches of compliance and realise the efficiency gains increased data standardisation will bring.
EMIR has taught us that taking a wait and see approach is not a viable option. Now is the time to begin speaking with technology vendors such as Broadridge to define a blueprint for how your firm will comply.
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