SFTR: Implementation and impact
28 May 2019
The first SFTR reporting obligation will take place on 11 April 2020, and it is important to start the preparation without delay, according to Fabien Romero of IHS Markit
Image: Shutterstock
As part of the policies identified by the Financial Stability Board (FSB) to increase transparency across securities financing transactions (SFTs), the European Union introduced the Â鶹´«Ã½ Financing Transaction Regulation (SFTR). The regulation includes a number of new rules for market participants, including a requirement to report all SFTs to an approved trade repository (TR).
The SFTR regulation is aiming to bring transparency on SFTs, based on three principles:
• Transparency of reuse (article 15): Reuse of collateral will be subject to conditions.
• Transparency towards investors (articles 13 and 14): Undertakings for collective instruments will be to disclose the use of SFTs and total return swaps to their investors.
• Transaction reporting (article 4): Counterparties will have to present SFTs in a European Market Infrastructure Regulation (EMIR) style report to TRs.
Regarding article 4 of the SFTR regulation, as of December 2018, the European Commission has adopted the level II legislation (regulatory technical standards [RTS] and implementing technical standards [ITS]) presented by the European Â鶹´«Ã½ and Markets Authority (ESMA) in the final report submitted on 31 March 2017. Following the end of the scrutiny period on 13 March 2019, the RTS and ITS have been published in the EU’s Official Journal. These will enter into force on 11 April 2019 (20 days after publication). The implementation will take place in four phases (see figure 1), according to the type of firm needing to report.
SFTs are defined as a repurchase transaction, securities or commodities lending or borrowing, a buy/sell-back or sell/buy-back transaction, margin lending transactions restricted to the prime brokerage activity or a total return swap transaction (only for the disclosure requirement - article 13).
The entities in securities finance products required to report include firms with European entities and all the branches of those entities; European branches of non-European entities; and financial and nonfinancial firms are required to report.
If both sides of the transactions are in scope, then both sides need to report—double-sided reporting (see Figure 2).
For UCITS and alternative investment funds (AIF), the management company is the company responsible for the reporting. It’s worth highlighting that delegation of reporting is allowed. Transactions to which a member of the European System of Central Banks (ESCB) is a counterparty should not be reported under SFTR. These transactions should, however, be reported under Markets in Financial Instruments Regulation (MiFIR) (article 2, RTS 22).
Transaction reporting under SFTR
Reporting timing
All transaction reports must be presented by T+1 to TRs (midnight universal time coordinated [UTC]), including the collateral if it is known at the point of trade. Where collateral is not known at the point of trade, it is reported on S+1. When the firm’s reporting obligation starts, any existing trade with a maturity greater than 180 days is reported, or where there is no maturity, a trade that remains open for 180 days after the initial reporting requirement will also need reporting to the TR.
Data fields needing reconciliation
Once reported to the TR, a trade-level reconciliation takes place (intra TR and inter TR), if both parties to the trade are in scope for reporting.
The TR will report back any breaks for firms to rectify, no later than T+2. The tolerances for matching are very limited; hence the fields need to match perfectly for most of them (see Figure 3).
Common challenges faced by the industry when implementing SFTR
Data aggregation
• Extensive dataset stored in several disparate systems
• Ability to extract all life-cycle events
• Extensive use of legal entity identifiers (LEIs)
• SFT taxonomy
Reporting Structure
• Challenging reporting timings
• High-volume reporting and complex event type/report type reporting structure
• Challenging process for some reporting entities that have not been exposed to any transaction reporting regime
Complex XML message structure
Double-sided reporting
• UTI creation, management and dissemination
• Extensive transaction information to be shared between both reporting counterparties
• Phased implementation generating asynchronous double-sided reporting
• Large number of fields required to be matched with very low tolerances
• Lack of fields standardisation that could potentially lead to high ratio of unmatched transactions
Resourcing
• Currently industry workflows are not easily leveraged, therefore, require the implementation of new workflows and the modification of the supporting target operation model
• Additional operational burden requiring significant additional technological and operational resources
Unique transaction identifier and double-sided reporting
In order to satisfy the dual-sided reporting requirements, unique transaction identifier (UTI)—and several other fields—will need to be shared between counterparties (see Figure 4). Therefore pairing/matching transactions before reporting to TRs will greatly facilitate the consistency of the information with the double-sided reporting.
UTIs must be reported consistently by both sides of the transaction. LEIs and UTI are the key fields supporting the intra- and inter-TR reconciliation. TR uses the combination of LEI of the reporting entity, LEI of the other counterparty and the UTI of the transaction to perform intra- and inter-TR reconciliation. Therefore, firms will need to be able to generate and publish UTIs as well as ingest UTIs from counterparts. The entity responsible for the generation of the UTI is decided, generally, by a bilateral agreement between counterparts or by the ESMA SFTR waterfall process. In many cases, a third party such as a multilateral trading facility (MTF), CCP or post-trade reconciliation service will generate the UTI, which both parties must use.
Timeline of reporting
Many firms will face significant challenges in meeting the reporting timescales mandated by SFTR, due to the degree of manual processing that still exists across the industry, and especially in repo.
Any manual intervention within the workflow slows the process and has the potential to introduce errors. Firms have an opportunity with the implementation of SFTR to transform the way the industry works, through more widespread adoption of automated platforms for trading, confirmation and life-cycle management, moving from end-of-day to intraday reconciliation and break management.
ISO 20022
Reports must be delivered to the TRs using ISO 20022 message standards. The equivalent standards for Markets in Financial Instruments Directive (MiFID) were published in May 2017, that is, eight months before the original go-live. A candidate message for ISO 20022 has been published on 16 March 2019, allowing market participants and TRs to create and test the data translations and mappings requirements.
Implementation plan and operational impacts
Business impacts
It is clear that the implementation of SFTR will have significant impact on securities finance businesses and how they operate. The expected business impacts can be categorised as follows:
Technology
When considering the significant effort that needs to take place to gather and manage all the data required for the reporting of action types, and considering that the SFT-related data often resides in disparate systems across sometimes siloed business lines from several entities, it is pretty clear that a data warehousing approach to support the data management of SFTs would not only make the support of the SFT reporting easier but also provide additional benefits:
• Enhanced business intelligence
• Increased system performance
• Timely access to data
• Enhanced data quality
• Historical intelligence
Furthermore, leveraging specialised vendors in the securities finance world will significantly reduce the burden of the implementation while improving the quality of the reporting, thanks to pre-reporting reconciliation tools.
Processes
• Life-cycle events booking will have to be booked on the same transaction (UTI) as the one used by the counterparty
• Agent lender disclosure (ALD): SFTR reports will force disclosure earlier to meet the T+1 reporting deadline
• Pre-reporting reconciliation and matching services will be expanded from the securities lending markets to the repo markets in order to improve the quality of the reporting
• Delegated reporting: Some firms will choose to offer delegated reporting to some of their underlying clients
• Supporting SFTR live: firms should leverage existing infrastructure to support the automation to help mitigate the potential volume of breaks they may encounter
Resources
SFTR will impact the life of staff supporting the SFT businesses, particularly regarding automation of processes and controls. How client reporting, delegated reporting and transaction reporting are performed and resourced will be critical to the success of the project.
This may result in additional headcount needs, new or changed job descriptions, skills and personal objectives, and of course people will need to be trained in the detailed operation of the new process and technology.
Cost or investment?
The budget allocated to the implementation of the SFTR regulation can vary depending on what the firm would like to do:
• Achieve minimum compliance?
• Delegated reporting as a revenue stream?
• Implement data warehouse with a larger scope than just SFTR?
Depending on the scope of the implementation, the cost and the complexity of the solution will vary. It is clear that the implementation of the SFTR regulation will be a challenge for the securities finance industry due to the complexity of its data requirements, the dual-sided reporting and the reporting timelines.
Although the first reporting obligation will take place on 11 April 2020, it is important to start the preparation without delay as there is much to be defined and implemented. There are, as well, significant benefits that can be found while implementing SFTR, which can create competitive advantages for organisations that are willing to implement a plan that goes beyond ‘just’ achieving the minimum compliance.
SFTR will force the securities finance market to become more automated, especially in the post-trade reconciliation for repos, and will provide standardisation across the industry.
Figure 1
Figure 2
Figure 3
Figure 4
The SFTR regulation is aiming to bring transparency on SFTs, based on three principles:
• Transparency of reuse (article 15): Reuse of collateral will be subject to conditions.
• Transparency towards investors (articles 13 and 14): Undertakings for collective instruments will be to disclose the use of SFTs and total return swaps to their investors.
• Transaction reporting (article 4): Counterparties will have to present SFTs in a European Market Infrastructure Regulation (EMIR) style report to TRs.
Regarding article 4 of the SFTR regulation, as of December 2018, the European Commission has adopted the level II legislation (regulatory technical standards [RTS] and implementing technical standards [ITS]) presented by the European Â鶹´«Ã½ and Markets Authority (ESMA) in the final report submitted on 31 March 2017. Following the end of the scrutiny period on 13 March 2019, the RTS and ITS have been published in the EU’s Official Journal. These will enter into force on 11 April 2019 (20 days after publication). The implementation will take place in four phases (see figure 1), according to the type of firm needing to report.
SFTs are defined as a repurchase transaction, securities or commodities lending or borrowing, a buy/sell-back or sell/buy-back transaction, margin lending transactions restricted to the prime brokerage activity or a total return swap transaction (only for the disclosure requirement - article 13).
The entities in securities finance products required to report include firms with European entities and all the branches of those entities; European branches of non-European entities; and financial and nonfinancial firms are required to report.
If both sides of the transactions are in scope, then both sides need to report—double-sided reporting (see Figure 2).
For UCITS and alternative investment funds (AIF), the management company is the company responsible for the reporting. It’s worth highlighting that delegation of reporting is allowed. Transactions to which a member of the European System of Central Banks (ESCB) is a counterparty should not be reported under SFTR. These transactions should, however, be reported under Markets in Financial Instruments Regulation (MiFIR) (article 2, RTS 22).
Transaction reporting under SFTR
Reporting timing
All transaction reports must be presented by T+1 to TRs (midnight universal time coordinated [UTC]), including the collateral if it is known at the point of trade. Where collateral is not known at the point of trade, it is reported on S+1. When the firm’s reporting obligation starts, any existing trade with a maturity greater than 180 days is reported, or where there is no maturity, a trade that remains open for 180 days after the initial reporting requirement will also need reporting to the TR.
Data fields needing reconciliation
Once reported to the TR, a trade-level reconciliation takes place (intra TR and inter TR), if both parties to the trade are in scope for reporting.
The TR will report back any breaks for firms to rectify, no later than T+2. The tolerances for matching are very limited; hence the fields need to match perfectly for most of them (see Figure 3).
Common challenges faced by the industry when implementing SFTR
Data aggregation
• Extensive dataset stored in several disparate systems
• Ability to extract all life-cycle events
• Extensive use of legal entity identifiers (LEIs)
• SFT taxonomy
Reporting Structure
• Challenging reporting timings
• High-volume reporting and complex event type/report type reporting structure
• Challenging process for some reporting entities that have not been exposed to any transaction reporting regime
Complex XML message structure
Double-sided reporting
• UTI creation, management and dissemination
• Extensive transaction information to be shared between both reporting counterparties
• Phased implementation generating asynchronous double-sided reporting
• Large number of fields required to be matched with very low tolerances
• Lack of fields standardisation that could potentially lead to high ratio of unmatched transactions
Resourcing
• Currently industry workflows are not easily leveraged, therefore, require the implementation of new workflows and the modification of the supporting target operation model
• Additional operational burden requiring significant additional technological and operational resources
Unique transaction identifier and double-sided reporting
In order to satisfy the dual-sided reporting requirements, unique transaction identifier (UTI)—and several other fields—will need to be shared between counterparties (see Figure 4). Therefore pairing/matching transactions before reporting to TRs will greatly facilitate the consistency of the information with the double-sided reporting.
UTIs must be reported consistently by both sides of the transaction. LEIs and UTI are the key fields supporting the intra- and inter-TR reconciliation. TR uses the combination of LEI of the reporting entity, LEI of the other counterparty and the UTI of the transaction to perform intra- and inter-TR reconciliation. Therefore, firms will need to be able to generate and publish UTIs as well as ingest UTIs from counterparts. The entity responsible for the generation of the UTI is decided, generally, by a bilateral agreement between counterparts or by the ESMA SFTR waterfall process. In many cases, a third party such as a multilateral trading facility (MTF), CCP or post-trade reconciliation service will generate the UTI, which both parties must use.
Timeline of reporting
Many firms will face significant challenges in meeting the reporting timescales mandated by SFTR, due to the degree of manual processing that still exists across the industry, and especially in repo.
Any manual intervention within the workflow slows the process and has the potential to introduce errors. Firms have an opportunity with the implementation of SFTR to transform the way the industry works, through more widespread adoption of automated platforms for trading, confirmation and life-cycle management, moving from end-of-day to intraday reconciliation and break management.
ISO 20022
Reports must be delivered to the TRs using ISO 20022 message standards. The equivalent standards for Markets in Financial Instruments Directive (MiFID) were published in May 2017, that is, eight months before the original go-live. A candidate message for ISO 20022 has been published on 16 March 2019, allowing market participants and TRs to create and test the data translations and mappings requirements.
Implementation plan and operational impacts
Business impacts
It is clear that the implementation of SFTR will have significant impact on securities finance businesses and how they operate. The expected business impacts can be categorised as follows:
Technology
When considering the significant effort that needs to take place to gather and manage all the data required for the reporting of action types, and considering that the SFT-related data often resides in disparate systems across sometimes siloed business lines from several entities, it is pretty clear that a data warehousing approach to support the data management of SFTs would not only make the support of the SFT reporting easier but also provide additional benefits:
• Enhanced business intelligence
• Increased system performance
• Timely access to data
• Enhanced data quality
• Historical intelligence
Furthermore, leveraging specialised vendors in the securities finance world will significantly reduce the burden of the implementation while improving the quality of the reporting, thanks to pre-reporting reconciliation tools.
Processes
• Life-cycle events booking will have to be booked on the same transaction (UTI) as the one used by the counterparty
• Agent lender disclosure (ALD): SFTR reports will force disclosure earlier to meet the T+1 reporting deadline
• Pre-reporting reconciliation and matching services will be expanded from the securities lending markets to the repo markets in order to improve the quality of the reporting
• Delegated reporting: Some firms will choose to offer delegated reporting to some of their underlying clients
• Supporting SFTR live: firms should leverage existing infrastructure to support the automation to help mitigate the potential volume of breaks they may encounter
Resources
SFTR will impact the life of staff supporting the SFT businesses, particularly regarding automation of processes and controls. How client reporting, delegated reporting and transaction reporting are performed and resourced will be critical to the success of the project.
This may result in additional headcount needs, new or changed job descriptions, skills and personal objectives, and of course people will need to be trained in the detailed operation of the new process and technology.
Cost or investment?
The budget allocated to the implementation of the SFTR regulation can vary depending on what the firm would like to do:
• Achieve minimum compliance?
• Delegated reporting as a revenue stream?
• Implement data warehouse with a larger scope than just SFTR?
Depending on the scope of the implementation, the cost and the complexity of the solution will vary. It is clear that the implementation of the SFTR regulation will be a challenge for the securities finance industry due to the complexity of its data requirements, the dual-sided reporting and the reporting timelines.
Although the first reporting obligation will take place on 11 April 2020, it is important to start the preparation without delay as there is much to be defined and implemented. There are, as well, significant benefits that can be found while implementing SFTR, which can create competitive advantages for organisations that are willing to implement a plan that goes beyond ‘just’ achieving the minimum compliance.
SFTR will force the securities finance market to become more automated, especially in the post-trade reconciliation for repos, and will provide standardisation across the industry.
Figure 1
Figure 2
Figure 3
Figure 4
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