SFTR health check
12 May 2020
Delta Capita, a firm that鈥檚 been very active in the SFTR testing space with its industry-standard test pack, talks to SLT about how it helps securities finance firms and where the test pack might go next.
Image: Shutterstock.com
With very little time remaining until the delayed SFTR go-live on 13 July, sell-side firms have some welcome breathing-space to complete their testing.
As a well-known stock loan trader-turned-consultant, why are stock borrow/loan trades so complicated to report?
Jonathan Adams: It is safe to say that a number of securities finance participants that were due to start transaction reporting in April breathed a sigh of relief when the first Securities Financing Transaction Regulation (SFTR) deadline was extended. Why? SFTR is by far the most complex and intricate of all the reporting regimes by virtue of the trade types caught by the regulation. Market participants have to report and match lifecycle events throughout the life of trade. A trade that matched with the counterparty鈥檚 submission to the trade repository on day one can fail to match on subsequent days over its lifetime. High-quality reporting relies on the technology of both submitting firms to ensure synchrony of their data.
Additionally, the phased compliance dates means that non-reporting participants must provide unique transaction identifiers (UTIs), legal entity identifiers (LEI) and allocations if securities are loaned via an agent lender. Even within an agency lending programme firms have different compliance dates. The combination of principal lending and agency lending by the same organisation complicates matters further.
The testing process must coordinate multiple projects, spanning the market participant, their reporting vendor(s) and their selected trade repository; all three must interoperate.
Whilst there is considerable expertise within the professional market participants, their low volume clients and counterparties may have underestimated this complexity. Some firms such as savings organisations and European corporates with banking entities are managing term multi-collateral trades on spreadsheets and are only now engaging the trade repositories for solutions.
No wonder you got out of trading to become a consultant! David, tell us about the consortium you created?
David Field: We first came up with the consortium idea back in 2018. We had done several SFTR solution design projects advising banks on business impact and vendor selection, that sort of thing. We realised each firm鈥檚 SFTR roadmap had similar chunks of work that wouldn鈥檛 be competitively sensitive, so we wondered if there was a smart way to mutualise costs. We tested the idea with a consortium of tier one banks and big agent lenders and they liked the idea of sharing costs to create an industry standard test pack.
SFTR test pack consortium: shared vision, shared costs
As Jon described, securities financing can be pretty complicated when you get into detail, so we needed a comprehensive test pack that firms could use across different business lines such as prime services, securities financing, agency lending and asset management.
We set about creating an automated test data generator (our creative naming department called it 鈥淭DG鈥�) so we could feed in any particular bank鈥檚 business mix, whether they are a lender, a borrower, an agent, along with the products they trade, how they collateralise, whether they use triparties, and how they plan to use vendors for UTI communication or reporting delegation. It turned out to be way more complicated than we originally imagined and the full industry test pack superset now contains 64 different trading scenarios, 197 trade types and 55 securities lending life-cycle events. So we reckon we can cater for most firms! Obviously, each firm only wants test data relevant to them, so the TDG filters to deliver a test pack to each firm containing only relevant test cases.
Test landscape: a sophisticated solution for a complex problem
Each test pack contains the test trades and reference data a firm needs for its user acceptance testing (UAT), along with the expected results it should be getting out of its application stack. We worked closely with DTCC to generate trade repository (TR)-ready ISO 20022 expected results, repeatedly validated until ultimately we reached 鈥渮ero NACK nirvana鈥�. This gives firms a well-structured approach to their UAT, providing 鈥渟afety in numbers鈥� confidence in the quality and completeness of their testing.
We also wanted to provide full regulatory traceability so we built on our securities finance process and data models to suck in 30 different documents including regulatory technical standards/implementing technical standards, the International Capital Market Association and the International Securities Lending Association best practices, the European Securities and Markets Authority (ESMA) guidelines and ISO standards. All told we analysed over 1500 pages of pretty dense regulatory text and linked every test case to the relevant paragraphs. That gives firms a fantastic resource for proving and auditing test completeness.
Along the way we developed our own 鈥楻eport Investigator鈥� tooling for investigating TR NACKs which can be hard to understand as they鈥檙e in XML, and we supply that tooling with the test pack. We can now support bilateral industry testing by providing mirror trade test packs so two counterparts can structure testing with each other all the way through to the TR.
That sounds like it was a lot of work! Does it all come to an end on 13 July?
Julian Eyre: Indeed. The sell side should now be focusing on completeness, timeliness and accuracy in time for go live in July; particularly through testing with counterparts and vendors. Delta Capita can help banks with bilateral testing by providing mirror-test packs so parties can test with vendors and TRs simultaneously and consistently, making it much easier to diagnose defects.
But testing doesn鈥檛 end in July. Attention is now turning to the buy side who start reporting in October. The buy side might have less complexity as many outsource securities lending transactions to an agent lender, but most still need to report repos.
As reporting matures, we anticipate that more edge cases - infrequent trade or event types 鈥� will come into focus. Then, 24 months after initial go-live a number of reporting fields will suddenly start being reconciled at the TRs, such as the general collateral indicator field, the SBL loan value field, and attributes like minimum notice period and earliest call back date. This could result in lots of new breaks. Plus, we can reasonably anticipate amendments to the regulation as ESMA and national competent authorities learn from the initial SFTR experience.
Ongoing regulatory changes need to be managed to ensure continuous compliance. We expect market participants to increasingly seek to reduce cost by engaging external service providers where there is no advantage to keeping activities in-house. The ongoing compliance requirements for SFTR are a good example. We have designed a Continuous Compliance Service based on our standard test pack to help align the industry through a controlled and transparent regression test strategy.
The collaborative SFTR consortium-led approach worked well and has really set an industry precedent. We believe there is a real opportunity to deliver similar benefits through consortium collaboration on the update to the European Market Infrastructure Regulation, known as EMIR Refit, and other future regulations, building on our award-winning Traceability Model and automated Test Data Generator.
As a well-known stock loan trader-turned-consultant, why are stock borrow/loan trades so complicated to report?
Jonathan Adams: It is safe to say that a number of securities finance participants that were due to start transaction reporting in April breathed a sigh of relief when the first Securities Financing Transaction Regulation (SFTR) deadline was extended. Why? SFTR is by far the most complex and intricate of all the reporting regimes by virtue of the trade types caught by the regulation. Market participants have to report and match lifecycle events throughout the life of trade. A trade that matched with the counterparty鈥檚 submission to the trade repository on day one can fail to match on subsequent days over its lifetime. High-quality reporting relies on the technology of both submitting firms to ensure synchrony of their data.
Additionally, the phased compliance dates means that non-reporting participants must provide unique transaction identifiers (UTIs), legal entity identifiers (LEI) and allocations if securities are loaned via an agent lender. Even within an agency lending programme firms have different compliance dates. The combination of principal lending and agency lending by the same organisation complicates matters further.
The testing process must coordinate multiple projects, spanning the market participant, their reporting vendor(s) and their selected trade repository; all three must interoperate.
Whilst there is considerable expertise within the professional market participants, their low volume clients and counterparties may have underestimated this complexity. Some firms such as savings organisations and European corporates with banking entities are managing term multi-collateral trades on spreadsheets and are only now engaging the trade repositories for solutions.
No wonder you got out of trading to become a consultant! David, tell us about the consortium you created?
David Field: We first came up with the consortium idea back in 2018. We had done several SFTR solution design projects advising banks on business impact and vendor selection, that sort of thing. We realised each firm鈥檚 SFTR roadmap had similar chunks of work that wouldn鈥檛 be competitively sensitive, so we wondered if there was a smart way to mutualise costs. We tested the idea with a consortium of tier one banks and big agent lenders and they liked the idea of sharing costs to create an industry standard test pack.
SFTR test pack consortium: shared vision, shared costs
As Jon described, securities financing can be pretty complicated when you get into detail, so we needed a comprehensive test pack that firms could use across different business lines such as prime services, securities financing, agency lending and asset management.
We set about creating an automated test data generator (our creative naming department called it 鈥淭DG鈥�) so we could feed in any particular bank鈥檚 business mix, whether they are a lender, a borrower, an agent, along with the products they trade, how they collateralise, whether they use triparties, and how they plan to use vendors for UTI communication or reporting delegation. It turned out to be way more complicated than we originally imagined and the full industry test pack superset now contains 64 different trading scenarios, 197 trade types and 55 securities lending life-cycle events. So we reckon we can cater for most firms! Obviously, each firm only wants test data relevant to them, so the TDG filters to deliver a test pack to each firm containing only relevant test cases.
Test landscape: a sophisticated solution for a complex problem
Each test pack contains the test trades and reference data a firm needs for its user acceptance testing (UAT), along with the expected results it should be getting out of its application stack. We worked closely with DTCC to generate trade repository (TR)-ready ISO 20022 expected results, repeatedly validated until ultimately we reached 鈥渮ero NACK nirvana鈥�. This gives firms a well-structured approach to their UAT, providing 鈥渟afety in numbers鈥� confidence in the quality and completeness of their testing.
We also wanted to provide full regulatory traceability so we built on our securities finance process and data models to suck in 30 different documents including regulatory technical standards/implementing technical standards, the International Capital Market Association and the International Securities Lending Association best practices, the European Securities and Markets Authority (ESMA) guidelines and ISO standards. All told we analysed over 1500 pages of pretty dense regulatory text and linked every test case to the relevant paragraphs. That gives firms a fantastic resource for proving and auditing test completeness.
Along the way we developed our own 鈥楻eport Investigator鈥� tooling for investigating TR NACKs which can be hard to understand as they鈥檙e in XML, and we supply that tooling with the test pack. We can now support bilateral industry testing by providing mirror trade test packs so two counterparts can structure testing with each other all the way through to the TR.
That sounds like it was a lot of work! Does it all come to an end on 13 July?
Julian Eyre: Indeed. The sell side should now be focusing on completeness, timeliness and accuracy in time for go live in July; particularly through testing with counterparts and vendors. Delta Capita can help banks with bilateral testing by providing mirror-test packs so parties can test with vendors and TRs simultaneously and consistently, making it much easier to diagnose defects.
But testing doesn鈥檛 end in July. Attention is now turning to the buy side who start reporting in October. The buy side might have less complexity as many outsource securities lending transactions to an agent lender, but most still need to report repos.
As reporting matures, we anticipate that more edge cases - infrequent trade or event types 鈥� will come into focus. Then, 24 months after initial go-live a number of reporting fields will suddenly start being reconciled at the TRs, such as the general collateral indicator field, the SBL loan value field, and attributes like minimum notice period and earliest call back date. This could result in lots of new breaks. Plus, we can reasonably anticipate amendments to the regulation as ESMA and national competent authorities learn from the initial SFTR experience.
Ongoing regulatory changes need to be managed to ensure continuous compliance. We expect market participants to increasingly seek to reduce cost by engaging external service providers where there is no advantage to keeping activities in-house. The ongoing compliance requirements for SFTR are a good example. We have designed a Continuous Compliance Service based on our standard test pack to help align the industry through a controlled and transparent regression test strategy.
The collaborative SFTR consortium-led approach worked well and has really set an industry precedent. We believe there is a real opportunity to deliver similar benefits through consortium collaboration on the update to the European Market Infrastructure Regulation, known as EMIR Refit, and other future regulations, building on our award-winning Traceability Model and automated Test Data Generator.
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