An industry reset, not just a deadline to be met
13 November 2018
Securities Lending Times was invited to an SFTR roundtable, headed by Adrian Dale of IHS Markit and Duncan Carpenter of Pirum Systems
Image: Shutterstock
Panel
participants
Adrian Dale
Product manager
IHS Markit
Duncan Carpenter
Head of SFTR
Pirum Systems
Harpreet Bains
Global product head for agent lending
J.P. Morgan
Paul Bradford
Director of financial markets, global securities finance
ING
Craig Laird
Vice president of regulatory operations
Morgan Stanley
Simon Nottage
Managing director, European head of securities finance product management
State Street
Jasper Dikker Hupkes
Managing director, head of global markets UK and head of securities finance UK
ABN AMRO
The Securities Financing Transactions Regulation (SFTR) threatens to affect firms across the board, including banks, investment firms, central counterparties (CCPs), central securities depositories (CSDs), insurance, reinsurance, undertakings, pension funds, UCITS, alternative investment funds (AIFs), and non-financial counterparties (NFCs).
Firms must prepare for SFTR as it closes in鈥攁s early as Q1 2020鈥攖o keep up with the regulation鈥檚 reporting requirements and avoid being left behind.
SFTR will require financial counterparties and NFCs to report their SFTs to an approved registered EU trade repository. Structurally, it is the same as reporting under the European Market Infrastructure Regulation (EMIR), requiring two-sided T+1 reporting. However, SFTR also asks that firms disclose requirements to investors and collateral reuse obligations.
Two of SFTR鈥檚 three pillars are already live. The first being disclosure requirement, which means funds must disclose the usage of SFTs and total return swaps. The second pillar mandates collateral reuse with the permission of the collateral provider. The third pillar is the SFT transaction reporting requirement. This covers repos, buy-sell backs, margin lending, and securities and commodities lending.
There are more than 150 reporting fields, spread across four tables, 80 of which apply to repo, marking a shakeup for the repo market.
Participants from across the securities lending industry were invited to the offices of IHS Markit in London to discuss how best to approach SFTR. The roundtable saw attendees highlight the hurdles and opportunities of technical standards while also providing an insight into their firm鈥檚 plan of action for Brexit.
Kicking off the roundtable, Adrian Dale, product manager at IHS Markit, remarked on how participants of the discussion represented a range of SFTR groups, including The International Capital Market Association (ICMA), The International Securities Lending Association (ISLA), and The Association for Financial Markets in Europe (AFME).
Dale said this showed a 鈥渇antastic amount of collaboration going on in the marketplace鈥.
鈥淎t the same time, there are a lot of issues that have been identified and we have come across many instances where the technical standards don鈥檛 match up with market practice.鈥 He warned: 鈥淲e need to talk about how that is impacting the underlying platforms used by the industry in the run-up to SFTR.鈥
Dale asked those in attendance how their firms were going to address technical standards in terms of build versus buy.
In response, Harpreet Bains, global product head for agent lending at J.P. Morgan, explained that there were four key questions firms should be asking when designing their SFTR models.
She said that, firstly, firms should question whether they are steering towards a single reporting model across [their] products and businesses鈥, or looking at 鈥渕ultiple solutions鈥.
Secondly, firms should be questioning in what capacity they are performing their reporting, according to Bains. Thirdly, Bains said firms should question whether they are trying to design an operating model that aims to only achieve minimum compliance, or do they aim to go beyond?
Finally, Bains explained that firms should be looking into how effective their technology and data is.
鈥淭here are key decisions around technology that need to be made鈥攂uild or buy and are you looking to future proof your reporting arrangements,鈥 she reflected.
Firms must also ask themselves if SFTR will act as 鈥渁 catalyst to getting rid of all, or a part, of their manual processes鈥, she said.
鈥淚t sounds clich茅, but it鈥檚 about deciding if you鈥檙e planning to dig up the road on the journey of compliance, which requires commitment.鈥
Paul Bradford, director of financial markets, global securities finance at ING, agreed but considered that smaller firms, through lack of resource, may not have the capital to achieve this kind of reset.
鈥淚 think that is a direction only the bigger firms will be able to afford,鈥 he stated.
Simon Nottage, European head of securities finance product management at State Street, asserted SFTR will encourage agent lenders, in particular, to look at upgrading their legacy custody platforms in the face of these new reporting requirements.
Nottage noted that compared to European Market Infrastructure Regulation (EMIR), Dodd-Frank, and Markets in Financial Instruments Directive (MiFID II), SFTR is enforcing 鈥渞eal鈥 change in the securities finance industry.
Association input
The roundtable then went on to discuss the involvement of the European Securities and Markets Authority (ESMA) and how the authority is looking at regulating transaction reporting.
Bradford questioned: 鈥淲hat does ESMA do if you鈥檙e only getting a 10 percent hit rate on your matching, what is going to be the consequences of that happening?鈥
He explained that this question would mean the difference between SFTR 鈥渇orcing people into just complying鈥 or 鈥渞eally making [SFTR] future proof鈥.
He noted that this might be left unknown until reporting has started.
Attendees then discussed the uncertainty caused by incorrect matching rates that were seen with EMIR and the lessons to be learned from it.
Participants compared SFTR to previous regulations and the external dependency on fulfilling the internal obligation and how that relates to the securities lending sector.
In terms of how to solution for securities lending and how you solution for your vendor, Craig Laird, vice president of regulatory operations at Morgan Stanley, said: 鈥淭here is a critical mass of the markets going through vendors and that can take away a big part of that strain, but there is inevitably a part that remains bilateral.鈥
He continued: 鈥淐lients have already come to us and said that they don鈥檛 always have the capacity to create unique trade identifiers or take on board and ingest data.鈥澛
鈥淗ow you can help them do that is largely a question of technology. It鈥檚 important that bigger firms, in particular, should consider having bespoke solutions for each client.鈥
On this point, Bains considered that working together as an industry is fundamental in managing the breadth of SFTR and that continued leadership from industry associations, vendors and providers, and communication amongst the same, is crucial. Bradford stated: 鈥淭here is a huge swell of support from associations such as ICMA and ISLA to implement best practice guidelines that match each other as far as they possibly can.鈥
But Bradford indicated that ICMA and ISLA do not have a fundamental mandate to implement anything so decisions will have to still have to be taken by each individual firm and following those guidelines will be key.
Defined consequences
Duncan Carpenter, head of SFTR at Pirum Systems, asked the roundtable if it would be easier to make decisions if there were defined consequences from regulators and national competent authorities (NCAs).
He questioned: 鈥淚n two to three years time, what will ESMA and the NCAs do with SFTR? Would it be useful to have more clarity when deciding where to focus resource?鈥
Nottage said: 鈥淚ndustry bodies are going to have to be very prescriptive and act accordingly regarding the outstanding issues that are not going to be addressed so that when fields don鈥檛 match or have a low match rate, the challenges should be reported to ESMA in advance so they know why match rates on certain fields are low.鈥
Jasper Dikker Hupkes, managing director, head of global markets UK and head of securities finance UK at ABN AMRO, stated: 鈥淭he industry has given enough soundbites towards regulators, and the expectation is that the matching rates will get better. But what happens if we lack clarity in some of these fields? We need to know the expectation.鈥
A question of fines
The group then moved on to discuss the effects that excessive fines could have on the market.
Nottage said: 鈥淚f you look at previous penalties and fines from regulators, they have focused on firm鈥檚 reporting efforts. The regulators can identify where firms have a focused resource to develop reporting infrastructure and complete data checks on what they are sending.鈥
Attendees discussed how in order not to lose revenue or counterparties, [firms] should not just look at regulators penalties, but look at fines from the perspective of potential business loss.
To this end, Bradford debated: 鈥淔undamentally, the market doesn鈥檛 understand that yet. From a cost perspective, we don鈥檛 really know the full costs involved, and whether some trades can actually support them.鈥
Concerns about disclosure
Carpenter then asked, from an agent lender perspective: 鈥淚s there still a significant part of your client base concerned about non-disclosure, knowing the additional transparency requirements that SFTR will bring?鈥
Bradford stated: 鈥淲e can only do what we can do from our side with the information that we have. If the lender decides that they are not going to give us the information, we have to ask ourselves whether we can continue to trade with them, and as a consequence, the answer will probably be no, as we still have the obligation to report.鈥
Laird added that borrowers, 鈥渁re going to have significant reference data challenges鈥. He said: 鈥淔undamentally, I don鈥檛 think that the market is getting serious enough about this.鈥
Attendees then debated the responsibility on the vendors to provide as much information as possible and the information that is collected externally.
They agreed that there is an element of fudging, whereby, in order to get match rates high, records may not match in some cases, because people can forget to book trades.
But now every transaction will cost something and every mistake will now be scrutinised with a cost associated with it, and refusing to use electronic means does cause mistakes.
Bradford expressed that the forthcoming ISLA and ICMA best practice guidelines will detail what should go into which field, and as a result, practitioners would together gauge an understanding of ways to record booking practices so they won鈥檛 necessarily have to be changed.
There are, however, some fundamental booking differences that will need to be addressed between firms here pre the go-live date.
Brexit
Dale and Carpenter then asked the group how Brexit might affect SFTR.
The attendees agreed that across the industry they had heard the opinion that if a deal is not reached by March 2019, when the UK is expected to leave the EU, that SFTR might be frozen or tossed aside. All agreed this would be very unlikely.
Laird added: 鈥淲here I see the impact for SFTR, regulation will apply either way, whether the UK is in the EU, or out of it.鈥
What should we do now?
Concluding the roundtable, Dale asked how firms should prepare themselves.
Carpenter predicted there could be a 鈥渕ajor upheaval in upstream processes systems鈥 come the SFTR deadline, he added he had encouraged Pirum clients to 鈥渂egin testing by the end of the year if possible鈥.
Laird noted there would be lots of focus in preparation for the go-live, and outcomes of system testing would give more indication of where technology challenges
will lie.
Dikker Hupkes stated: 鈥淭he benefit of forums are very beneficial, I would suggest taking notes from their standardisation and guidance.鈥
He added: 鈥淭here鈥檚 safety in numbers too. The more ownership you have of your business, the more you will progress, and that鈥檚 the way we want to progress as an industry, together.鈥
Bradford stated that SFTR needs to be treated as a technological solution for most of the market, throwing extra resource at it in terms of headcount cannot be a long-term solution.
鈥淭he securities lending industry has in the past been slow to adapt to new technology, but now firms could really fall by the wayside if they don鈥檛 keep up,鈥 he said.
He reiterated that solutions do however need to take into account those with smaller budgets as the smaller firms often do not have the same resources and capital as bigger firms.
Bains advised: 鈥淨uestion what you鈥檙e gaining from [SFTR], look at it deeper. You need the commitment from the outset.鈥
鈥淭hink about your SFTR compliance model fitting into your longer-term business model, not just as a deadline to meet.鈥
participants
Adrian Dale
Product manager
IHS Markit
Duncan Carpenter
Head of SFTR
Pirum Systems
Harpreet Bains
Global product head for agent lending
J.P. Morgan
Paul Bradford
Director of financial markets, global securities finance
ING
Craig Laird
Vice president of regulatory operations
Morgan Stanley
Simon Nottage
Managing director, European head of securities finance product management
State Street
Jasper Dikker Hupkes
Managing director, head of global markets UK and head of securities finance UK
ABN AMRO
The Securities Financing Transactions Regulation (SFTR) threatens to affect firms across the board, including banks, investment firms, central counterparties (CCPs), central securities depositories (CSDs), insurance, reinsurance, undertakings, pension funds, UCITS, alternative investment funds (AIFs), and non-financial counterparties (NFCs).
Firms must prepare for SFTR as it closes in鈥攁s early as Q1 2020鈥攖o keep up with the regulation鈥檚 reporting requirements and avoid being left behind.
SFTR will require financial counterparties and NFCs to report their SFTs to an approved registered EU trade repository. Structurally, it is the same as reporting under the European Market Infrastructure Regulation (EMIR), requiring two-sided T+1 reporting. However, SFTR also asks that firms disclose requirements to investors and collateral reuse obligations.
Two of SFTR鈥檚 three pillars are already live. The first being disclosure requirement, which means funds must disclose the usage of SFTs and total return swaps. The second pillar mandates collateral reuse with the permission of the collateral provider. The third pillar is the SFT transaction reporting requirement. This covers repos, buy-sell backs, margin lending, and securities and commodities lending.
There are more than 150 reporting fields, spread across four tables, 80 of which apply to repo, marking a shakeup for the repo market.
Participants from across the securities lending industry were invited to the offices of IHS Markit in London to discuss how best to approach SFTR. The roundtable saw attendees highlight the hurdles and opportunities of technical standards while also providing an insight into their firm鈥檚 plan of action for Brexit.
Kicking off the roundtable, Adrian Dale, product manager at IHS Markit, remarked on how participants of the discussion represented a range of SFTR groups, including The International Capital Market Association (ICMA), The International Securities Lending Association (ISLA), and The Association for Financial Markets in Europe (AFME).
Dale said this showed a 鈥渇antastic amount of collaboration going on in the marketplace鈥.
鈥淎t the same time, there are a lot of issues that have been identified and we have come across many instances where the technical standards don鈥檛 match up with market practice.鈥 He warned: 鈥淲e need to talk about how that is impacting the underlying platforms used by the industry in the run-up to SFTR.鈥
Dale asked those in attendance how their firms were going to address technical standards in terms of build versus buy.
In response, Harpreet Bains, global product head for agent lending at J.P. Morgan, explained that there were four key questions firms should be asking when designing their SFTR models.
She said that, firstly, firms should question whether they are steering towards a single reporting model across [their] products and businesses鈥, or looking at 鈥渕ultiple solutions鈥.
Secondly, firms should be questioning in what capacity they are performing their reporting, according to Bains. Thirdly, Bains said firms should question whether they are trying to design an operating model that aims to only achieve minimum compliance, or do they aim to go beyond?
Finally, Bains explained that firms should be looking into how effective their technology and data is.
鈥淭here are key decisions around technology that need to be made鈥攂uild or buy and are you looking to future proof your reporting arrangements,鈥 she reflected.
Firms must also ask themselves if SFTR will act as 鈥渁 catalyst to getting rid of all, or a part, of their manual processes鈥, she said.
鈥淚t sounds clich茅, but it鈥檚 about deciding if you鈥檙e planning to dig up the road on the journey of compliance, which requires commitment.鈥
Paul Bradford, director of financial markets, global securities finance at ING, agreed but considered that smaller firms, through lack of resource, may not have the capital to achieve this kind of reset.
鈥淚 think that is a direction only the bigger firms will be able to afford,鈥 he stated.
Simon Nottage, European head of securities finance product management at State Street, asserted SFTR will encourage agent lenders, in particular, to look at upgrading their legacy custody platforms in the face of these new reporting requirements.
Nottage noted that compared to European Market Infrastructure Regulation (EMIR), Dodd-Frank, and Markets in Financial Instruments Directive (MiFID II), SFTR is enforcing 鈥渞eal鈥 change in the securities finance industry.
Association input
The roundtable then went on to discuss the involvement of the European Securities and Markets Authority (ESMA) and how the authority is looking at regulating transaction reporting.
Bradford questioned: 鈥淲hat does ESMA do if you鈥檙e only getting a 10 percent hit rate on your matching, what is going to be the consequences of that happening?鈥
He explained that this question would mean the difference between SFTR 鈥渇orcing people into just complying鈥 or 鈥渞eally making [SFTR] future proof鈥.
He noted that this might be left unknown until reporting has started.
Attendees then discussed the uncertainty caused by incorrect matching rates that were seen with EMIR and the lessons to be learned from it.
Participants compared SFTR to previous regulations and the external dependency on fulfilling the internal obligation and how that relates to the securities lending sector.
In terms of how to solution for securities lending and how you solution for your vendor, Craig Laird, vice president of regulatory operations at Morgan Stanley, said: 鈥淭here is a critical mass of the markets going through vendors and that can take away a big part of that strain, but there is inevitably a part that remains bilateral.鈥
He continued: 鈥淐lients have already come to us and said that they don鈥檛 always have the capacity to create unique trade identifiers or take on board and ingest data.鈥澛
鈥淗ow you can help them do that is largely a question of technology. It鈥檚 important that bigger firms, in particular, should consider having bespoke solutions for each client.鈥
On this point, Bains considered that working together as an industry is fundamental in managing the breadth of SFTR and that continued leadership from industry associations, vendors and providers, and communication amongst the same, is crucial. Bradford stated: 鈥淭here is a huge swell of support from associations such as ICMA and ISLA to implement best practice guidelines that match each other as far as they possibly can.鈥
But Bradford indicated that ICMA and ISLA do not have a fundamental mandate to implement anything so decisions will have to still have to be taken by each individual firm and following those guidelines will be key.
Defined consequences
Duncan Carpenter, head of SFTR at Pirum Systems, asked the roundtable if it would be easier to make decisions if there were defined consequences from regulators and national competent authorities (NCAs).
He questioned: 鈥淚n two to three years time, what will ESMA and the NCAs do with SFTR? Would it be useful to have more clarity when deciding where to focus resource?鈥
Nottage said: 鈥淚ndustry bodies are going to have to be very prescriptive and act accordingly regarding the outstanding issues that are not going to be addressed so that when fields don鈥檛 match or have a low match rate, the challenges should be reported to ESMA in advance so they know why match rates on certain fields are low.鈥
Jasper Dikker Hupkes, managing director, head of global markets UK and head of securities finance UK at ABN AMRO, stated: 鈥淭he industry has given enough soundbites towards regulators, and the expectation is that the matching rates will get better. But what happens if we lack clarity in some of these fields? We need to know the expectation.鈥
A question of fines
The group then moved on to discuss the effects that excessive fines could have on the market.
Nottage said: 鈥淚f you look at previous penalties and fines from regulators, they have focused on firm鈥檚 reporting efforts. The regulators can identify where firms have a focused resource to develop reporting infrastructure and complete data checks on what they are sending.鈥
Attendees discussed how in order not to lose revenue or counterparties, [firms] should not just look at regulators penalties, but look at fines from the perspective of potential business loss.
To this end, Bradford debated: 鈥淔undamentally, the market doesn鈥檛 understand that yet. From a cost perspective, we don鈥檛 really know the full costs involved, and whether some trades can actually support them.鈥
Concerns about disclosure
Carpenter then asked, from an agent lender perspective: 鈥淚s there still a significant part of your client base concerned about non-disclosure, knowing the additional transparency requirements that SFTR will bring?鈥
Bradford stated: 鈥淲e can only do what we can do from our side with the information that we have. If the lender decides that they are not going to give us the information, we have to ask ourselves whether we can continue to trade with them, and as a consequence, the answer will probably be no, as we still have the obligation to report.鈥
Laird added that borrowers, 鈥渁re going to have significant reference data challenges鈥. He said: 鈥淔undamentally, I don鈥檛 think that the market is getting serious enough about this.鈥
Attendees then debated the responsibility on the vendors to provide as much information as possible and the information that is collected externally.
They agreed that there is an element of fudging, whereby, in order to get match rates high, records may not match in some cases, because people can forget to book trades.
But now every transaction will cost something and every mistake will now be scrutinised with a cost associated with it, and refusing to use electronic means does cause mistakes.
Bradford expressed that the forthcoming ISLA and ICMA best practice guidelines will detail what should go into which field, and as a result, practitioners would together gauge an understanding of ways to record booking practices so they won鈥檛 necessarily have to be changed.
There are, however, some fundamental booking differences that will need to be addressed between firms here pre the go-live date.
Brexit
Dale and Carpenter then asked the group how Brexit might affect SFTR.
The attendees agreed that across the industry they had heard the opinion that if a deal is not reached by March 2019, when the UK is expected to leave the EU, that SFTR might be frozen or tossed aside. All agreed this would be very unlikely.
Laird added: 鈥淲here I see the impact for SFTR, regulation will apply either way, whether the UK is in the EU, or out of it.鈥
What should we do now?
Concluding the roundtable, Dale asked how firms should prepare themselves.
Carpenter predicted there could be a 鈥渕ajor upheaval in upstream processes systems鈥 come the SFTR deadline, he added he had encouraged Pirum clients to 鈥渂egin testing by the end of the year if possible鈥.
Laird noted there would be lots of focus in preparation for the go-live, and outcomes of system testing would give more indication of where technology challenges
will lie.
Dikker Hupkes stated: 鈥淭he benefit of forums are very beneficial, I would suggest taking notes from their standardisation and guidance.鈥
He added: 鈥淭here鈥檚 safety in numbers too. The more ownership you have of your business, the more you will progress, and that鈥檚 the way we want to progress as an industry, together.鈥
Bradford stated that SFTR needs to be treated as a technological solution for most of the market, throwing extra resource at it in terms of headcount cannot be a long-term solution.
鈥淭he securities lending industry has in the past been slow to adapt to new technology, but now firms could really fall by the wayside if they don鈥檛 keep up,鈥 he said.
He reiterated that solutions do however need to take into account those with smaller budgets as the smaller firms often do not have the same resources and capital as bigger firms.
Bains advised: 鈥淨uestion what you鈥檙e gaining from [SFTR], look at it deeper. You need the commitment from the outset.鈥
鈥淭hink about your SFTR compliance model fitting into your longer-term business model, not just as a deadline to meet.鈥
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