SFTR Insight: Prepare ahead of time

John Kernan - Interview in Securities Lending Times Issue 203

30.05.2018

This article was first published in the Securities Lending Times on 29 May 2018

What should firms be doing right now to prepare for the implementation of the Securities Financing Transactions Regulation (SFTR)?

Firms should have a project team in place and be towards the end of the process of reviewing the data required to be reported and, in particular, understanding how much of that data the firm has within its own systems and where it is located. Almost certainly, no one will have all of the data and so they then need to work out how to get the ‘delta’, and the best way to consolidate all of this information, format into XML ISO 20022 and get to their trade repository all by T+1.

What challenges are firms finding while preparing for SFTR compliance?

Over and above the sheer volume of data and the fragmented nature of it already discussed, one of the other things that firms need to do is to work out how securities financing transactions (SFT) reporting—and compliance—will run in business as usual (BAU). If the reporting has been delegated, somewhere within the organisation then they will need to have a robust process in place to monitor the quality of what has been reported on their behalf. Even if it hasn’t been delegated, there will be exception management in terms of trades, which do not pass the trade repository (TR) validations, or those which do, but cannot be matched due to data discrepancies with the counterparty. Wherever this sits within your organisation, you will need internal audit and compliance to help you establish the appropriate control framework. It’s not just a question of executing an implementation project, SFTR compliance requires ongoing and dedicated resourcing.

If preparations and compliance are done correctly, what benefits can SFTR provide?

An organisation, which effectively builds their own internal data repository, can benefit from increased transparency across a number of areas, whether it be for trade monitoring purposes or for things like identifying opportunities for operational efficiencies, more effective use of collateral and so on.

In addition to this, one of the by-products of the implementation of the regulation is greater standardisation across the surrounding process flows. This, in itself, should improve accuracy and efficiency.

What would you recommend firms do to ensure a smooth implementation?

Engage with the trade associations to help build a consensus on best booking and reporting practice. Also, identify whether it makes sense to report directly or use the services of an intermediary—there are many good ones out there with considerable expertise in this space. Go through a proper selection process, both with your intermediary—if you chose to report this way, but also with your TR. The quality of engagement and responses to request for information will likely be a good indication of future performance for implementation. Once you have made your selections, test as much as you can as early as you can.

Will market participants be expected to report perfectly from day one?

Theoretically, it is incumbent on market participants to report correctly from day one. Although the regulators will probably not publicly say it, I think that there is a tacit understanding that for something as complex as SFTR it is a process of learning by doing, and that there will be unforeseen issues that arise in production. To my mind, the most important thing is to be able to demonstrate that you have the appropriate control framework in place to quickly identify exceptions and anomalies and to take remedial action as soon as possible. Of course, you also need a highly responsive TR to assist you with this.

Why should market participants choose REGIS-TR as their trade repository for SFTR?

SFTR is complex and niche. REGIS-TR is a sister company of Clearstream and Eurex and so we are the only TR, which truly combines regulatory reporting expertise with securities lending, repo and collateral management expertise. We will also service significant ‘own’ reporting flow from these sister companies.

In addition to this, where we really differentiate ourselves is through service support. As already discussed, there will be exception management. We have seen with European Market Infrastructure Regulation (EMIR) that implementation of regulatory reporting is iterative. You need a TR who is going to assist you through all of this. If you are using another TR, you need to ask yourself the question “When we need support with this change, am I able to speak to the head of IT, the head of product or the head of functional design?” At REGIS-TR, we stay very close to our customers to help them through the entire lifecycle of regulatory reporting.

What other trends are you seeing in the trade repository sector?

I think that the TR landscape is becoming more competitive. We have seen an additional two TRs authorised under the European Market Infrastructure Regulation (EMIR) regime. Although we probably won’t see as many TRs applying for SFTR, one trend we are definitely seeing is a move away from automatically consolidating all of your reporting through a single TR. Market participants are looking at SFTR on its own merits and selecting the TR, which has the most expertise in this area. They are also using this as a point of inflection regarding the performance and pricing of their incumbent EMIR TR. We are seeing lots of request for proposals from new prospects. In a similar vein, the European Securities and Markets Authority published EMIR portability guidelines last year with the aim of increasing healthy competition between TRs.