What comes next?
22 January 2019
With SFTR to take legal force in early April, Seb Malik of Market FinReg and Fabian Klar of Regis-TR discuss what鈥檚 next for the regulation
Image: Shutterstock
The Securities Financing Transactions Regulation (SFTR) obliges an approximately 10,000 firms to transaction report at a day-one cost of an estimated 鈧�150 million to 鈧�200 million. It affects firms as small as non-financial counterparties right up to multi-national investment banks and reinsurance firms.
SFTR requires a huge amount of data, much of it will not be held internally and it must be reported by the next working day with multiple daily trade lifecycle updates for the same transaction until expiration for many transactions.
SFTR transaction reporting is due to achieve legal force on or around 3 April this year, short of an objection being raised by the EU Council or EU Parliament during their three-month scrutiny period.
After the Promethean torture of having to endure a one-and-a-half-year delay, the EU Commission finally adopted the long-awaited level II legislation in December last year. These 10 delegated acts comprise the details. A lot of them are specific to trade repositories while the two that specify the details and formats of transaction reports have general application.
As a leading trade repository, we at Regis-TR have been poring over all texts ensuring we pick up any differences between the Commission鈥檚 adopted texts and the original the European Securities and Markets Authority (ESMA) drafts that were published in March 2017.
During meetings with clients, we are often asked 鈥榳hat happens next鈥�? Did the Commission change anything in the adopted texts? When will we have to file the first transaction report? How will Brexit affect SFTR? What should we be doing? How can Regis-TR and Market FinReg help? For the benefit of the wider community, I鈥檇 like to share my views.
What happens next?
The delegated acts were adopted by the EU Commission on various dates in December. While the EU Council adopted a scrutiny period of one-month which they extended once to two months in total, the EU Parliament chose a three-month scrutiny period. This means that as long as neither institutions raise objections, SFTR will enter the Official Journal on or around 13 March, achieving legal force 20 days later鈥攎aking 3 April the target date.
The first firms to transaction report are the second Market in Financial Instruments Directive (MiFID II) firms and banks, 12 months later鈥擜pril 2020. This much is confirmed.
Should the parliament vote to extend its scrutiny period then this would push these dates out by three months but this is not our expectation for two reasons. Firstly, European elections are in May and secondly, as we shall discuss, the commission has only made minor changes to the March 2017 drafts.
So, in summary, April 2020 is the date when the first transaction reports must be delivered to trade repositories.
Did the EU Commission change anything?
Yes and no. The adopted texts are almost identical to the ESMA鈥檚 drafts. The headline change is the number of fields to be reported has increased from 153 to 155. Table four now comprises 18 fields compared to 16 in ESMA鈥檚 draft. The two extra fields are simple currency fields to specify the currency of the reused collateral (new field 10) and the currency of the funding source (new field 17).
The other changes are minor tweaks to validation rules including the textual description which has benefited from a helpful clean-up.
When will we have to file the first transaction report?
As discussed, April 2020 is the start date, with the minor caveats already cited. MiFID II investment firms and the Capital Requirements Directive IV (CRD IV) firms鈥攅ssentially banks鈥攚ill be the first to report. Thereafter European Market Infrastructure Regulation central counterparties (CCPs) and central securities depositories (CSDs) will report from July 2020; UCITS and Alternative Investment Fund Managers (AIFMs) as well as insurance companies in October 2020 and non-financial counterparties January 2021鈥攏ote the January 2021 date is after the proposed Brexit two-year transition period that ends on 31 December 2020, the significance of this we鈥檒l discuss below.
What does this mean in practical terms? During the phase-in period, matching will prove complicated because reports that are, in essence, two-sided will remain one-sided due to the other side not yet having been phased in. Regis-TR is aware of this quirk of nature and is taking mitigating steps to reduce the number of non-matches.
Data, data, data
The word 鈥榙ata鈥� occurs 1,109 times in ESMA鈥檚 SFTR draft legislation final report. And if we were to single out the most challenging aspect to transaction reporting, it would be sourcing the required data. The required data is often siloed and so new systems and processes must be created to cut horizontally across verticals. A lot of data will not be available in-house and so will have to be sourced externally.
Regis-TR is interoperable across all the major data vendors. We have forged partnerships with leading vendors who will be providing vital data enrichment services for onward reporting to us. Our comprehensive system will be accepting transaction reports directly from clients, via delegated reporting or via a third-party data vendor including Equilend/Trax and IHS Markit/Pirum. Taking Equilend鈥檚 multilateral trading facility (MTF) as an example, it processes 90,000 plus new trades per day and 60 plus percent of their NGT platform鈥檚 trade flow are SFTR reportable transactions. This flow can seamlessly be reported on to our trade repository.
Electronification and SFT trade flow is shifting to MTFs as a direct result of SFTR鈥檚 matching regime. With 96 fields (albeit 32 after 24 months) being required to match to zero or very low tolerance thresholds, having both sides鈥� data in one consolidated place such as a trading platform makes the task of both sides accurately reporting the same details immeasurably simpler.
Our EMIR trade repository regularly processes more than 30 million new trades per week for over 2,000 individual clients accounts.
Product expertise and training
With our parent company, Clearstream, an active participant in the securities financing markets, REGIS-TR already has unrivalled in-house expertise in these markets and will capture a high proportion of SFT reports across the UK and mainland Europe. We are also in the process of establishing a separate UK entity for our TR for UK clients to Brexit-proof our operations.
We have also partnered with Market FinReg, a leading consultancy. Together we are providing cutting-edge SFTR training to empower your in-house operations, project managers and business analysts to perform vital project work. The training is available in person in London, Luxembourg, Frankfurt and Madrid or online with material posted out. We consider it essential to get key personnel trained immediately to allow SFTR projects to proceed immediately in an efficient manner.
Now that the legal texts have been adopted, Market FinReg is helping firms to conduct gap analyses to identify deficiencies in both data and processes and subsequently design appropriate solutions.
A quick and immediate project that should be undertaken is to identify all of the following entities that you interact with and to ensure they have valid legal entity identifiers (LEIs): counterparties, submitting entities, branches, other counterparties, beneficiaries, tri-party agents, brokers, clearing members, CSDs, agent lenders, CCPs and security and issuers.
Brexit
No piece would be complete without mentioning the six-letter word. The worst-case scenario is a no-deal (perhaps more accurately described as a minimalistic-deal) Brexit. Regis-TR has mitigated against the worst-case scenario by establishing a UK entity. We have a long and established presence in London via our parent company Clearstream and are building out our UK TR.
While Market FinReg has been briefing clients with the lengthy minutiae, in summary, Brexit affects SFTR as follows: the UK is 鈥榦nshoring鈥� SFTR, meaning that the UK is copying and pasting the EU SFTR and putting it onto the UK鈥檚 own law register.
The UK Treasury explains that it would 鈥渃reate a dual reporting burden on firms as an inevitable consequence of the UK leaving the EU without a deal鈥�. In other words, firms would have to report twice: once to the UK TR and once to the EU TR. The treasury continues: 鈥淓vidence indicates that this additional burden is not expected to be significant as firms would be reporting the same data, using the same templates, to both TRs.鈥�
A further complication arises in that the level II legislation, that we discussed at the beginning of this piece, which has not yet entered the EU鈥檚 Official Journal will not be onshored in time. We are left with a vague 鈥渢he government is acting to explore alternative means to ensure that SFTR is able to function in the UK as intended in all exit scenarios鈥�.
A bill is currently passing through parliament that empowers the treasury to pass regulations for up to two years after Brexit. This would solve the problem. In any case, I am confident the entire suite of SFTR transaction reporting legislation will be onshored to the UK in due course.
SFTR is a beast, but with our help, it can be tamed. As discussed, Market FinReg and Regis-TR are offering cutting-edge training; it is a great way to learn the granular details from experts
SFTR requires a huge amount of data, much of it will not be held internally and it must be reported by the next working day with multiple daily trade lifecycle updates for the same transaction until expiration for many transactions.
SFTR transaction reporting is due to achieve legal force on or around 3 April this year, short of an objection being raised by the EU Council or EU Parliament during their three-month scrutiny period.
After the Promethean torture of having to endure a one-and-a-half-year delay, the EU Commission finally adopted the long-awaited level II legislation in December last year. These 10 delegated acts comprise the details. A lot of them are specific to trade repositories while the two that specify the details and formats of transaction reports have general application.
As a leading trade repository, we at Regis-TR have been poring over all texts ensuring we pick up any differences between the Commission鈥檚 adopted texts and the original the European Securities and Markets Authority (ESMA) drafts that were published in March 2017.
During meetings with clients, we are often asked 鈥榳hat happens next鈥�? Did the Commission change anything in the adopted texts? When will we have to file the first transaction report? How will Brexit affect SFTR? What should we be doing? How can Regis-TR and Market FinReg help? For the benefit of the wider community, I鈥檇 like to share my views.
What happens next?
The delegated acts were adopted by the EU Commission on various dates in December. While the EU Council adopted a scrutiny period of one-month which they extended once to two months in total, the EU Parliament chose a three-month scrutiny period. This means that as long as neither institutions raise objections, SFTR will enter the Official Journal on or around 13 March, achieving legal force 20 days later鈥攎aking 3 April the target date.
The first firms to transaction report are the second Market in Financial Instruments Directive (MiFID II) firms and banks, 12 months later鈥擜pril 2020. This much is confirmed.
Should the parliament vote to extend its scrutiny period then this would push these dates out by three months but this is not our expectation for two reasons. Firstly, European elections are in May and secondly, as we shall discuss, the commission has only made minor changes to the March 2017 drafts.
So, in summary, April 2020 is the date when the first transaction reports must be delivered to trade repositories.
Did the EU Commission change anything?
Yes and no. The adopted texts are almost identical to the ESMA鈥檚 drafts. The headline change is the number of fields to be reported has increased from 153 to 155. Table four now comprises 18 fields compared to 16 in ESMA鈥檚 draft. The two extra fields are simple currency fields to specify the currency of the reused collateral (new field 10) and the currency of the funding source (new field 17).
The other changes are minor tweaks to validation rules including the textual description which has benefited from a helpful clean-up.
When will we have to file the first transaction report?
As discussed, April 2020 is the start date, with the minor caveats already cited. MiFID II investment firms and the Capital Requirements Directive IV (CRD IV) firms鈥攅ssentially banks鈥攚ill be the first to report. Thereafter European Market Infrastructure Regulation central counterparties (CCPs) and central securities depositories (CSDs) will report from July 2020; UCITS and Alternative Investment Fund Managers (AIFMs) as well as insurance companies in October 2020 and non-financial counterparties January 2021鈥攏ote the January 2021 date is after the proposed Brexit two-year transition period that ends on 31 December 2020, the significance of this we鈥檒l discuss below.
What does this mean in practical terms? During the phase-in period, matching will prove complicated because reports that are, in essence, two-sided will remain one-sided due to the other side not yet having been phased in. Regis-TR is aware of this quirk of nature and is taking mitigating steps to reduce the number of non-matches.
Data, data, data
The word 鈥榙ata鈥� occurs 1,109 times in ESMA鈥檚 SFTR draft legislation final report. And if we were to single out the most challenging aspect to transaction reporting, it would be sourcing the required data. The required data is often siloed and so new systems and processes must be created to cut horizontally across verticals. A lot of data will not be available in-house and so will have to be sourced externally.
Regis-TR is interoperable across all the major data vendors. We have forged partnerships with leading vendors who will be providing vital data enrichment services for onward reporting to us. Our comprehensive system will be accepting transaction reports directly from clients, via delegated reporting or via a third-party data vendor including Equilend/Trax and IHS Markit/Pirum. Taking Equilend鈥檚 multilateral trading facility (MTF) as an example, it processes 90,000 plus new trades per day and 60 plus percent of their NGT platform鈥檚 trade flow are SFTR reportable transactions. This flow can seamlessly be reported on to our trade repository.
Electronification and SFT trade flow is shifting to MTFs as a direct result of SFTR鈥檚 matching regime. With 96 fields (albeit 32 after 24 months) being required to match to zero or very low tolerance thresholds, having both sides鈥� data in one consolidated place such as a trading platform makes the task of both sides accurately reporting the same details immeasurably simpler.
Our EMIR trade repository regularly processes more than 30 million new trades per week for over 2,000 individual clients accounts.
Product expertise and training
With our parent company, Clearstream, an active participant in the securities financing markets, REGIS-TR already has unrivalled in-house expertise in these markets and will capture a high proportion of SFT reports across the UK and mainland Europe. We are also in the process of establishing a separate UK entity for our TR for UK clients to Brexit-proof our operations.
We have also partnered with Market FinReg, a leading consultancy. Together we are providing cutting-edge SFTR training to empower your in-house operations, project managers and business analysts to perform vital project work. The training is available in person in London, Luxembourg, Frankfurt and Madrid or online with material posted out. We consider it essential to get key personnel trained immediately to allow SFTR projects to proceed immediately in an efficient manner.
Now that the legal texts have been adopted, Market FinReg is helping firms to conduct gap analyses to identify deficiencies in both data and processes and subsequently design appropriate solutions.
A quick and immediate project that should be undertaken is to identify all of the following entities that you interact with and to ensure they have valid legal entity identifiers (LEIs): counterparties, submitting entities, branches, other counterparties, beneficiaries, tri-party agents, brokers, clearing members, CSDs, agent lenders, CCPs and security and issuers.
Brexit
No piece would be complete without mentioning the six-letter word. The worst-case scenario is a no-deal (perhaps more accurately described as a minimalistic-deal) Brexit. Regis-TR has mitigated against the worst-case scenario by establishing a UK entity. We have a long and established presence in London via our parent company Clearstream and are building out our UK TR.
While Market FinReg has been briefing clients with the lengthy minutiae, in summary, Brexit affects SFTR as follows: the UK is 鈥榦nshoring鈥� SFTR, meaning that the UK is copying and pasting the EU SFTR and putting it onto the UK鈥檚 own law register.
The UK Treasury explains that it would 鈥渃reate a dual reporting burden on firms as an inevitable consequence of the UK leaving the EU without a deal鈥�. In other words, firms would have to report twice: once to the UK TR and once to the EU TR. The treasury continues: 鈥淓vidence indicates that this additional burden is not expected to be significant as firms would be reporting the same data, using the same templates, to both TRs.鈥�
A further complication arises in that the level II legislation, that we discussed at the beginning of this piece, which has not yet entered the EU鈥檚 Official Journal will not be onshored in time. We are left with a vague 鈥渢he government is acting to explore alternative means to ensure that SFTR is able to function in the UK as intended in all exit scenarios鈥�.
A bill is currently passing through parliament that empowers the treasury to pass regulations for up to two years after Brexit. This would solve the problem. In any case, I am confident the entire suite of SFTR transaction reporting legislation will be onshored to the UK in due course.
SFTR is a beast, but with our help, it can be tamed. As discussed, Market FinReg and Regis-TR are offering cutting-edge training; it is a great way to learn the granular details from experts
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