Setting out the stall
28 April 2020
In a second look at the SWIFT-based UTI exchange model, SimCorp details the results of its webinar with buy-side members on whether the solution might solve their needs for bilateral SFTs
Image: Graphic farm/Shutterstock.com
With the SFTR go-live getting nearer, much discussion has taken place on how the buy-side can best navigate the path to compliance with the Securities Financing Transactions Regulation (SFTR). Data has formed one of the more significant challenges for the most part. However, while many firms have focused on the overwhelming 155 fields of data and figuring out the complex ISO 20022 format of the reporting, another equally important workflow has been left largely overshadowed until now. This workflow is, of course, the now much talked about handling and exchange of the Unique Transaction Identifier (UTI), which is still bamboozling investment firms and credit institutions.
While not in the majority rearview mirror, exchange of UTIs has been debated by pockets of the buy-side industry over the past two years, with much of the discussion centring around how counterparties to an SFT can efficiently exchange UTIs and with minimal effort. As UTIs need to be consistent across reporting on both sides of the transaction, they represent a bigger challenge then under the European Markets Infrastructure Regulation (EMIR), for good reason. The market for SFTs is more complex and fragmented than derivatives, with very little electronic trading which makes daily operations and exchange of information more difficult.
In a recent webinar held by SimCorp, with clients PGGM and Nykredit, where this topic was explored, two fundamental questions arose, in trying to tackle best practice: Who generates the UTI and how to exchange the UTI.
Who generates the UTI?
In considering who is responsible for creating these UTIs, whomever that party is, the UTI needs to be the same for both parties. The waterfall model proposed by the European Securities and Markets Authority is relatively clear, but the complexity lies in the implementation for bilateral SFTs. Without a venue or central counterparty involved as an intermediary, both parties to a bilateral SFT trade need to have an agreement in place on who generates the UTI and how it is shared with the other party.
This is the same rule as under EMIR, where buy-side firms typically agreed with their sell-side counterparties on who will generate the UTI. Ideally, similar agreements can be reached for SFTR, too. Still, it leaves the buy-side with the challenge of how to efficiently receive the UTI from their counterparty.
How to exchange the UTI?
SFTs such as repos and buy sell-backs comprise of multiple counterparties, using a variety of triparty vendors, and continue to be traded mostly manually, via chat or phone. This makes the communication and re-keying of long UTIs, error-prone and arduous at best, and creates operational risk such as the non-receipt of a UTI or delayed reporting, at worst.
Today, there are two options the buy-side are considering to counter electronic UTI exchange for SFTR but they come with significant costs and operational risks.
Exchanging .csv files by email
In the recent webinar, when we asked participants how their firms planned to exchange UTIs with counterparties, for bilateral SFT, the votes were split almost evenly between exchanging an individual UTI during trade execution by email (and/or chat and phone), and a combination of this, with the use of a dedicated UTI exchange platform. Although cheap, emails are difficult to automate at scale and require clear agreements between counterparties about the exchange format and timing. It also carries significant operational cost and burden, involving entirely manual processes for exception handling, especially if exchange formats cannot be unified across counterparties. UTI exchange platforms
Several vendors are offering UTI exchange platforms, but connecting is laborious and unless access is sponsored by the sell-side counterparty, expensive too. The lack of integrated exception management workflows also carries additional costs and risks. Lastly, the market for these platforms is fragmented without interoperability, so one platform will only help to exchange a UTI with a subset of counterparties and not all.
There is another way鈥�
There is, however, a third option which has emerged over the course of the last few months and that is exchanging UTIs, via an existing settlement infrastructure; SWIFT.
The Danish Bankers鈥� Association, spearheaded by Nykredit, and the Danish central securities depository (CSD), VP Securities, have implemented a SWIFT workflow to exchange UTIs between counterparties, as part of the collateral settlement process. Indeed, the latest SWIFT release includes a dedicated field for the UTI, which would see the CSD pass this field on to the counterparties within SWIFT match confirmation messages, for the exchanged collateral.
This solution, though relatively unknown, proves attractive for buy-side firms, as it allows full automation of the UTI exchange at little extra cost. Many counterparties already have SWIFT settlement processes in place and this approach requires only minor changes to implement. When polled, 79 percent of the participants on the webinar, were in favour of learning more about UTI exchange via SWIFT settlement infrastructure.
Having delivered our clients a live, fully-automated and managed, SFTR cloud solution, five months before the SFTR go-live date, SimCorp and its Regulatory Center of Excellence, is committed to supporting operational efficiency within the buy-side community.
Having taken greater responsibility for regulatory compliance and maintenance, we are invested in our clients鈥� ability to effectively integrate SFTR compliance into their operations, enabling them to focus on their core business.
As part of this commitment, we are confident that by promoting dialogue among relevant market participants, and with significant buy-side engagement, along with the involvement of counterparties and custodians, the SWIFT protocol will become market best practice.
While not in the majority rearview mirror, exchange of UTIs has been debated by pockets of the buy-side industry over the past two years, with much of the discussion centring around how counterparties to an SFT can efficiently exchange UTIs and with minimal effort. As UTIs need to be consistent across reporting on both sides of the transaction, they represent a bigger challenge then under the European Markets Infrastructure Regulation (EMIR), for good reason. The market for SFTs is more complex and fragmented than derivatives, with very little electronic trading which makes daily operations and exchange of information more difficult.
In a recent webinar held by SimCorp, with clients PGGM and Nykredit, where this topic was explored, two fundamental questions arose, in trying to tackle best practice: Who generates the UTI and how to exchange the UTI.
Who generates the UTI?
In considering who is responsible for creating these UTIs, whomever that party is, the UTI needs to be the same for both parties. The waterfall model proposed by the European Securities and Markets Authority is relatively clear, but the complexity lies in the implementation for bilateral SFTs. Without a venue or central counterparty involved as an intermediary, both parties to a bilateral SFT trade need to have an agreement in place on who generates the UTI and how it is shared with the other party.
This is the same rule as under EMIR, where buy-side firms typically agreed with their sell-side counterparties on who will generate the UTI. Ideally, similar agreements can be reached for SFTR, too. Still, it leaves the buy-side with the challenge of how to efficiently receive the UTI from their counterparty.
How to exchange the UTI?
SFTs such as repos and buy sell-backs comprise of multiple counterparties, using a variety of triparty vendors, and continue to be traded mostly manually, via chat or phone. This makes the communication and re-keying of long UTIs, error-prone and arduous at best, and creates operational risk such as the non-receipt of a UTI or delayed reporting, at worst.
Today, there are two options the buy-side are considering to counter electronic UTI exchange for SFTR but they come with significant costs and operational risks.
Exchanging .csv files by email
In the recent webinar, when we asked participants how their firms planned to exchange UTIs with counterparties, for bilateral SFT, the votes were split almost evenly between exchanging an individual UTI during trade execution by email (and/or chat and phone), and a combination of this, with the use of a dedicated UTI exchange platform. Although cheap, emails are difficult to automate at scale and require clear agreements between counterparties about the exchange format and timing. It also carries significant operational cost and burden, involving entirely manual processes for exception handling, especially if exchange formats cannot be unified across counterparties. UTI exchange platforms
Several vendors are offering UTI exchange platforms, but connecting is laborious and unless access is sponsored by the sell-side counterparty, expensive too. The lack of integrated exception management workflows also carries additional costs and risks. Lastly, the market for these platforms is fragmented without interoperability, so one platform will only help to exchange a UTI with a subset of counterparties and not all.
There is another way鈥�
There is, however, a third option which has emerged over the course of the last few months and that is exchanging UTIs, via an existing settlement infrastructure; SWIFT.
The Danish Bankers鈥� Association, spearheaded by Nykredit, and the Danish central securities depository (CSD), VP Securities, have implemented a SWIFT workflow to exchange UTIs between counterparties, as part of the collateral settlement process. Indeed, the latest SWIFT release includes a dedicated field for the UTI, which would see the CSD pass this field on to the counterparties within SWIFT match confirmation messages, for the exchanged collateral.
This solution, though relatively unknown, proves attractive for buy-side firms, as it allows full automation of the UTI exchange at little extra cost. Many counterparties already have SWIFT settlement processes in place and this approach requires only minor changes to implement. When polled, 79 percent of the participants on the webinar, were in favour of learning more about UTI exchange via SWIFT settlement infrastructure.
Having delivered our clients a live, fully-automated and managed, SFTR cloud solution, five months before the SFTR go-live date, SimCorp and its Regulatory Center of Excellence, is committed to supporting operational efficiency within the buy-side community.
Having taken greater responsibility for regulatory compliance and maintenance, we are invested in our clients鈥� ability to effectively integrate SFTR compliance into their operations, enabling them to focus on their core business.
As part of this commitment, we are confident that by promoting dialogue among relevant market participants, and with significant buy-side engagement, along with the involvement of counterparties and custodians, the SWIFT protocol will become market best practice.
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