SFTR: the clock is ticking
11 December 2018
Delegates gathered at the SimCorp seminar in London to discuss the looming deadline of SFTR
Image: Shutterstock
While many are packing up for the festive break, and listening to Jingle Bells on repeat, some within the securities finance industry can only hear alarm bells as the Securities Financing Transactions Regulation (SFTR) deadline approaches.
Some of these alarm bells and fears were put to bed by a group of industry panellists at a SFTR seminar hosted by SimCorp in London.
The panellists, Gernot Schmidt of SimCorp, Sandra Castro Lopez of Regis-TR, Patrick Middelkoop of PGGM and David Field of The Field Effect, discussed SFTR鈥檚 expected impact on the buy-side industry, the significance of a firms鈥� target operating model, and gave a step-by-step guide to prepare for the 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 before it closes in鈥攚hich is expected to be as early as Q1 2020鈥攖o keep up with the regulation鈥檚 reporting requirements and avoid being left behind.
It is the latest in a long raft of regulations, that happens to coincide with Brexit, creating a risk for firms, who may get caught short whilst focusing on the former issue. As a result, these firms may find themselves rushing this through as an IT project rather than a long-term business strategy.
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 sharp shakeup for the repo market. A key challenge presented by the regulation is the availability of data, for example, trade details and collateral information. Timeliness of data is also a top concern. Much of this is down to the data being in disparate, fragmented systems, making this regulatory task harder than it should be. With many buy-side firms reliant on several parties, and systems, the larger issue is of data access and transparency.
David Field, managing director of The Field Effect, got the conversation going by stating the sell-side is way ahead of the buy-side for SFTR, though stated the buy-side would still be accountable under the regulation. However, he affirmed, 鈥渢he buy-side is getting itself in order鈥�.
The floor was then handed to Sandra Castro Lopez, relationship manager at Regis-TR, who asked the audience how many of them had started their SFTR programme, with around 60 delegates, about half raised their hands. This resonated with a recent straw poll at a SimCorp client conference, which saw the average rating for firms鈥� SFTR鈥檚 readiness at a low 39 percent. Out of the buy-side participants present, 41 percent had not yet defined their operating model.
According to SimCorp, when coupled with the margin squeeze many firms are feeling, the high costs associated with addressing regulations through tactical IT projects are now becoming difficult to justify or sustain. A change in approach is necessary, and the operational transparency offered by an investment book of record (IBOR) may just be the antidote needed to counteract this continually complex investment management landscape.
Castro Lopez stated that SFTR is broadly drawn on EMIR and, in fact, we see many references to EMIR in the specifications themselves. However, under SFTR there are going to be many more lifecycle events that will have to be reported compared to those under EMIR.
She added that because the timeframe is yet to be confirmed, though it the reporting start date is expected to begin as early as Q1 2020, some institutions are having difficulties in assigning budget and resources to their SFTR projects.
What鈥檚 more, with many buy-side firms operating on an outsourced/delegated model for securities lending, the ultimate responsibility for complete reporting lies with the firm itself. It is also not guaranteed that all custodians or lending agents will offer delegated reporting services, because of the high cost and additional legal responsibility involved. According to SimCorp, this will force buy-side firms to gain an understanding of their SFT data and onboard their transactions. Without a single source of data, for example, IBOR this onboarding will be difficult.
Field then went on to explain the four areas of reporting to consider, as well as the 153 data attributes under in the published RTS, though there is a proposal to move this to 155, in which he explained the importance of Legal Entity Identifiers (LEIs) and unique trade identifiers (UTIs), which at this stage should not be underestimated and are key.
He also discussed that reporting collateral reuse will be challenging. What鈥檚 more, the new regime could reduce liquidity from some sources of collateral supply, if some beneficial owners re-direct lending activity to non-European markets.
Delegates were then taken through a diagram summarizing key SFTR requirements which indicated what will be reconciled in terms of trade repository reconciliation. The graph indicated that 96 fields will be phased in for reconciliation both intra- and inter-TR.
The graph also highlighted how the industry must carry out timely and accurate reporting, indicating this should be T+1 for transactions and for collateral known at the point of the trade.
Transaction-level reporting is to be used for repo, securities lending and buy-sell back. Position level reporting should be used for margin lending.
It isn鈥檛 all doom and gloom though, and some on the panel believe SFTR can trigger productive and constructive change, including competitive advantage with the right target operating model. This may well create further interest in the market.
For those firms consolidating their operations, rather than taking a patchwork approach to regulations, it can make all the difference. For one it enables firms to pool data and cut costs by using a centralised source of data for both for processing and reporting.
The panel went on to discuss SFTR鈥檚 data impact and the areas of data that could be difficult to source.
In terms of counterparty data, Field explained many data attributes are likely to be difficult to source. For example, UTIs from other counterparties, the country of the other counterparty, beneficiaries, the value of reused collateral, and estimated reused of collateral, could be difficult to source.
In fact, he said, around 40 percent of SFTR related data could be difficult to source, which 鈥渨ould be problematic鈥�.
In addition, Field explained the current challenges around booking models and that it is not just the new trade in question that must be reported under new SFTR ruling, but all lifecycle events.
Field communicated to delegates that though regulators are not expecting everything to match on the first day of SFTR鈥檚 implementation, NCAs will analyse information from TRs and firms must aim for their books and records to match.
But he added: 鈥淣CA鈥檚 will examine your matching rates, and they will be shining a spotlight on firms that fall below the average.鈥�
Patrick Middelkoop, the application consultant for PGGM, highlights this is not only a compliance concern but a business concern, commenting: 鈥淓veryone in your organisation should be ready for compliance.鈥�
Middelkoop added the most industry impact will be felt in clearing and trading venues, though he said that the SFTR regulation will create an entrance burden for new participants on the market.
For the time being, Field noted SFTR would remain within the borders of Europe but Asian markets are expected to follow, though the US position is not clear. Ultimately, the FSB and regulators want SFTR implemented globally.
The subject of Brexit came into the conversation as discussions turned to what delegate鈥檚 priorities should be moving into Q1 2019.
Gernot Schmidt, product manager at SimCorp said the main priority between now and March (when the UK is expected to leave the EU) should be planning for a post-Brexit world. He said after Brexit, SFTR should be the second priority.
Field then discussed how resources can be used toward the expected live date of SFTR, which could be as early as Q1 2020. To this, he said: 鈥淚t is high risk to wait until 2020. Firms must plan for 2019 build and test.鈥�
To which, Castro-Lopez added, 鈥渢he implementation timeline hasn鈥檛 been confirmed which makes planning more complex鈥�.
Schmidt stated: 鈥淢ore testing time is needed for staff, but you cannot assume you will be given that. We believe the distinct operational elements of an IBOR, can achieve reporting quality close to 100 percent. These include the automation of day to day report processes, validation of trade data against the regulatory rule set, as part of post-trade processing and a consistent view and source for reporting data across the business.鈥�
Field concluded: 鈥淵ou鈥檒l have to start resourcing your delivery plan pretty quickly in 2019, and you need to start now. Allow as much time as you can鈥� build a 2019 roadmap very quickly if you haven鈥檛 already.鈥�
Some of these alarm bells and fears were put to bed by a group of industry panellists at a SFTR seminar hosted by SimCorp in London.
The panellists, Gernot Schmidt of SimCorp, Sandra Castro Lopez of Regis-TR, Patrick Middelkoop of PGGM and David Field of The Field Effect, discussed SFTR鈥檚 expected impact on the buy-side industry, the significance of a firms鈥� target operating model, and gave a step-by-step guide to prepare for the 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 before it closes in鈥攚hich is expected to be as early as Q1 2020鈥攖o keep up with the regulation鈥檚 reporting requirements and avoid being left behind.
It is the latest in a long raft of regulations, that happens to coincide with Brexit, creating a risk for firms, who may get caught short whilst focusing on the former issue. As a result, these firms may find themselves rushing this through as an IT project rather than a long-term business strategy.
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 sharp shakeup for the repo market. A key challenge presented by the regulation is the availability of data, for example, trade details and collateral information. Timeliness of data is also a top concern. Much of this is down to the data being in disparate, fragmented systems, making this regulatory task harder than it should be. With many buy-side firms reliant on several parties, and systems, the larger issue is of data access and transparency.
David Field, managing director of The Field Effect, got the conversation going by stating the sell-side is way ahead of the buy-side for SFTR, though stated the buy-side would still be accountable under the regulation. However, he affirmed, 鈥渢he buy-side is getting itself in order鈥�.
The floor was then handed to Sandra Castro Lopez, relationship manager at Regis-TR, who asked the audience how many of them had started their SFTR programme, with around 60 delegates, about half raised their hands. This resonated with a recent straw poll at a SimCorp client conference, which saw the average rating for firms鈥� SFTR鈥檚 readiness at a low 39 percent. Out of the buy-side participants present, 41 percent had not yet defined their operating model.
According to SimCorp, when coupled with the margin squeeze many firms are feeling, the high costs associated with addressing regulations through tactical IT projects are now becoming difficult to justify or sustain. A change in approach is necessary, and the operational transparency offered by an investment book of record (IBOR) may just be the antidote needed to counteract this continually complex investment management landscape.
Castro Lopez stated that SFTR is broadly drawn on EMIR and, in fact, we see many references to EMIR in the specifications themselves. However, under SFTR there are going to be many more lifecycle events that will have to be reported compared to those under EMIR.
She added that because the timeframe is yet to be confirmed, though it the reporting start date is expected to begin as early as Q1 2020, some institutions are having difficulties in assigning budget and resources to their SFTR projects.
What鈥檚 more, with many buy-side firms operating on an outsourced/delegated model for securities lending, the ultimate responsibility for complete reporting lies with the firm itself. It is also not guaranteed that all custodians or lending agents will offer delegated reporting services, because of the high cost and additional legal responsibility involved. According to SimCorp, this will force buy-side firms to gain an understanding of their SFT data and onboard their transactions. Without a single source of data, for example, IBOR this onboarding will be difficult.
Field then went on to explain the four areas of reporting to consider, as well as the 153 data attributes under in the published RTS, though there is a proposal to move this to 155, in which he explained the importance of Legal Entity Identifiers (LEIs) and unique trade identifiers (UTIs), which at this stage should not be underestimated and are key.
He also discussed that reporting collateral reuse will be challenging. What鈥檚 more, the new regime could reduce liquidity from some sources of collateral supply, if some beneficial owners re-direct lending activity to non-European markets.
Delegates were then taken through a diagram summarizing key SFTR requirements which indicated what will be reconciled in terms of trade repository reconciliation. The graph indicated that 96 fields will be phased in for reconciliation both intra- and inter-TR.
The graph also highlighted how the industry must carry out timely and accurate reporting, indicating this should be T+1 for transactions and for collateral known at the point of the trade.
Transaction-level reporting is to be used for repo, securities lending and buy-sell back. Position level reporting should be used for margin lending.
It isn鈥檛 all doom and gloom though, and some on the panel believe SFTR can trigger productive and constructive change, including competitive advantage with the right target operating model. This may well create further interest in the market.
For those firms consolidating their operations, rather than taking a patchwork approach to regulations, it can make all the difference. For one it enables firms to pool data and cut costs by using a centralised source of data for both for processing and reporting.
The panel went on to discuss SFTR鈥檚 data impact and the areas of data that could be difficult to source.
In terms of counterparty data, Field explained many data attributes are likely to be difficult to source. For example, UTIs from other counterparties, the country of the other counterparty, beneficiaries, the value of reused collateral, and estimated reused of collateral, could be difficult to source.
In fact, he said, around 40 percent of SFTR related data could be difficult to source, which 鈥渨ould be problematic鈥�.
In addition, Field explained the current challenges around booking models and that it is not just the new trade in question that must be reported under new SFTR ruling, but all lifecycle events.
Field communicated to delegates that though regulators are not expecting everything to match on the first day of SFTR鈥檚 implementation, NCAs will analyse information from TRs and firms must aim for their books and records to match.
But he added: 鈥淣CA鈥檚 will examine your matching rates, and they will be shining a spotlight on firms that fall below the average.鈥�
Patrick Middelkoop, the application consultant for PGGM, highlights this is not only a compliance concern but a business concern, commenting: 鈥淓veryone in your organisation should be ready for compliance.鈥�
Middelkoop added the most industry impact will be felt in clearing and trading venues, though he said that the SFTR regulation will create an entrance burden for new participants on the market.
For the time being, Field noted SFTR would remain within the borders of Europe but Asian markets are expected to follow, though the US position is not clear. Ultimately, the FSB and regulators want SFTR implemented globally.
The subject of Brexit came into the conversation as discussions turned to what delegate鈥檚 priorities should be moving into Q1 2019.
Gernot Schmidt, product manager at SimCorp said the main priority between now and March (when the UK is expected to leave the EU) should be planning for a post-Brexit world. He said after Brexit, SFTR should be the second priority.
Field then discussed how resources can be used toward the expected live date of SFTR, which could be as early as Q1 2020. To this, he said: 鈥淚t is high risk to wait until 2020. Firms must plan for 2019 build and test.鈥�
To which, Castro-Lopez added, 鈥渢he implementation timeline hasn鈥檛 been confirmed which makes planning more complex鈥�.
Schmidt stated: 鈥淢ore testing time is needed for staff, but you cannot assume you will be given that. We believe the distinct operational elements of an IBOR, can achieve reporting quality close to 100 percent. These include the automation of day to day report processes, validation of trade data against the regulatory rule set, as part of post-trade processing and a consistent view and source for reporting data across the business.鈥�
Field concluded: 鈥淵ou鈥檒l have to start resourcing your delivery plan pretty quickly in 2019, and you need to start now. Allow as much time as you can鈥� build a 2019 roadmap very quickly if you haven鈥檛 already.鈥�
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