Securities financing regulatory reporting: What does the future hold?
03 September 2024
Significant change is afoot in the SFT and money markets reporting space in the coming years. Kaizen鈥檚 Money Markets Reporting Director Jonathan Lee reviews the upcoming reporting obligations as regulatory pressures build once again
Image: stock.adobe.com/julio
The post-Securities Financing Transactions Regulation (SFTR) go-live lull looks set to be followed by an unprecedented level of securities financing regulatory reporting activity from now until 2027/2028.
July鈥檚 Money Market Statistical Reporting (MMSR) extended scope is followed by the US Office of Financial Research (OFR) Uncleared Bilateral Repo reporting in December, the SFTR Review/Refit is likely to commence in 2025, and US Financial Industry Regulatory Authority鈥檚 (FINRA鈥檚) Securities Lending and Transparency Engine (SLATE) reporting goes live in 2026.
Back in 2015, when the Financial Stability Board (FSB) published 鈥楽tandards and Processes for Global Securities Financing Data Collection and Aggregation鈥�, the principal focus of all securities financing reporting regimes was in identifying global systemic risks in SFT markets and nipping them in the bud before they potentially seeded the next financial crisis.
These were different times 鈥� 'Brexit' was not yet in the vocabulary, and the regulatory reporting fines from regulators such as the UK Financial Conduct Authority (FCA) were mounting up. Since then, notably in the securities financing space (seen as one of the unfortunate bedrocks of the crisis) and following SFTR implementation and similar regulations in jurisdictions such as Japan, it has been a sea of calm and light-touch regulation, certainly from an enforcement perspective.
We are starting to see signs that the regulatory pressures are building again, with the introduction of many new regulations, re-writes, re-fits and changes, together with national competent authorities and the central European regulator, the European Securities and Markets Authority (ESMA), which simply cannot continue to cry wolf. To call out failures to close out open term securities loans three years in a row in its 2023 report on the quality and use of data, and not take punitive action, is really testing the patience of the national competent authorities.
SEC goes global
The US has been very slow to fully embrace the full spectrum of SFTs captured by regulatory reporting requirements such as SFTR (all repos, both cleared and uncleared, all buy-sellbacks/sell-buybacks, all securities lending and borrowing transactions and all margin loans entered into under a prime brokerage agreement).
While US triparty repo has been captured by the Federal Reserve Bank of New York from the clearing banks, BNY, and JPMorgan Chase, and cleared repo data has been extracted from the Government Securities Division (GSD) of the Fixed Income Clearing Corporation (FICC) since 2010, the other SFT products are clear gaps. Notably, there has not been any reporting of the uncleared bilateral repo market or securities lending market.
A trade reporting obligation
The US Securities and Exchange Commission (SEC), while late to the party with securities lending reporting, has taken an entirely different tack in framing this as a trade reporting requirement, rather than transaction reporting for systemic risk purposes.
When the SEC鈥檚 Rule 10c-1a was put to public consultation, it received more than 2,000 responses. Retail investors were demanding fairness, checks and balances, and controls to be put in place around short selling and the securities lending market that facilitates hedge fund equity market plays. Several stock market scandals have left their scars on the market and finally the SEC has decided it is time to act.
Vast expansive scope
One of the key principles of the FSB鈥檚 framework was that reporting would be collated regionally before being shared globally, in order to identify systemic risks evident in a G-SIBs鈥� global portfolio, not just the operations in a single jurisdiction.
There was a great deal of concern about double counting. If SFT activities were captured in one jurisdiction, they should not be captured and shared in another jurisdiction, thereby overstating the risk. Despite this and with fairness in mind, the SEC does not see it fit to treat non-US residents any differently when it comes to trade reporting obligations.
Given the predominance of US stocks and securities and the prevalence of foreign holders of US stocks particularly in the tech space, this requirement, if followed through with, will result in a vast expansive scope for any lenders of US securities to report, regardless of their jurisdiction or domicile.
Enforcement
You might ask, how can FINRA and the SEC enforce such widespread compliance globally with SLATE reporting?
This question is still to be answered, particularly regarding timeliness of reports in very different time zones. Nevertheless, FINRA and the SEC could attempt to monitor securities settlements, however, making the distinction between outright cash sales and purchases and loans will still be a significant challenge.
Additionally, if the loan is covered by an internal move within the depo of a major financial institution, then this move to cover a short will not be transparent other than to the depo account holder. While all US securities, regardless of where they settle 鈥� either domestically, through International Securities Depositories (ICSDs), or central securities depositories (CSDs) 鈥� will be subject to cross border cooperation and US registers, FINRA may need to leverage existing reports such as agent lending disclosure to uncover otherwise hidden securities loans. However, potentially, FINRA may have unwittingly bitten off more than it can chew if it expects to have full international compliance on day one.
Indeed, this super-equivalence, which demands that international market participants submit reports to FINRA in the US, does not exist for US firms entering into SFT transactions elsewhere in the world. This would be unlikely to engender cooperation, if the ask is to leverage SFTR reports that would identify US securities being loaned by European market participants in the absence of this definitive information elsewhere.
More reportable fields
Nevertheless, the pressure is on, the number of reportable fields has swelled from 12 data elements to up to 48 fields, and a rather complex web of intraday activities and lifecycle events are required to be reported. It may simply act as the ultimate recruiting sergeant for US agent lenders to wrap up this market on the promise that they will make the necessary reports to FINRA for lenders on behalf of beneficial owners.
OFR uncleared bilateral repo reporting
Barely before the ink has dried on the FINRA SLATE consultation response, the OFR鈥檚 non-centrally cleared bilateral repo data (NCCBR) reporting will commence for the largest brokers and dealers from 2 December 2024. Other significant financial companies in the US non-centrally cleared bilateral repo market will follow in April 2025.
The OFR requirements are comparatively straightforward, albeit, following an extended period in which there were no hands-on SFT reporting requirements in the US at all.
Reporting firms are required to submit up to 32 fields of data by 11:00 on trade date plus one (T+1) in a user-friendly csv or txt format to the OFR鈥檚 Data Collection Utility.
The only lifecycle or action type required is the need to resubmit a day鈥檚 complete submission should OFR enquiries result in the identification of an error.
This approach to regulatory reporting is rather refreshing and most in line with the original 2015 FSB鈥檚 proposals. In 32 fields, the regulators should have a clear view of potentially systemically significant uncleared bilateral repo market positions.
However, there are a couple of notable omissions with the lack of any provision for bilateral margin and variation margin reporting that typically takes place at the portfolio rather than transaction level. There does not appear to be scope for collateral re-use reporting either.
More is more
The mood music in Europe still appears to be playing the tune of 鈥楳ore is More鈥� when it comes to regulatory reporting. The European Market Infrastructure Regulation (EMIR) Refit was the ultimate case in point. Despite the Regulatory Oversight Committee (ROC) producing 鈥榦nly鈥� 110 Common Data Elements (CDE) for adoption in derivative reporting regimes globally, they still found it fit for EMIR to swell from 129 to 203 fields.
There are a number of elements of the EMIR Refit that are likely to be discussed as possible SFTR additions. These include:
鈥� Executing Agent Field 鈥� its current absence causes a lot of pain in the trade repository reconciliation process and other fields such as agent lender or broker as misused in its place.
鈥� Effective dates 鈥� such that pre-agreed changes to trade economics can be reported as soon as agreed rather than needing to be delayed.
鈥� Intra-group identifier 鈥� reducing the burden on regulators to identify inter-group transactions and book transfers.
鈥� Incorporating bilateral variation margins together with CCP margins in a single data table to simplify the margin reporting process and ensure higher levels of compliance. At present, the margin table is solely for reporting CCP margins. Bilateral variation margins must be reported using an intricate collection of collateral updates, with and without unique trade identifiers (UTIs) and is frequently under-reported or misreported.
鈥� Post-Brexit waterfall structure for the generation and sharing of UTIs when trading cross-jurisdiction. At present, the rules governing the generation and sharing of UTIs only apply within a single jurisdiction, not when trading across jurisdictions, causing confusion, operational pain and late reporting.
鈥� Additionally, event types complementing certain action types,聽package identifiers聽(useful for identifying products such as collateral swaps) and the聽requirement to report the nature and corporate sector of the other counterparty in addition to the reporting counterparty may also be incorporated.
Global securities financing regulatory reporting timeline
While I would argue that additional fields such as executing agent and effective dates make a lot of sense, together with a rationalisation of margin reporting, it would be good to see ESMA and the FCA being bold and willing to withdraw certain fields too.
The author highlighted to the assembled group of global regulators at the FSB in 2014/2015, that for many of the instrument reference data questions, if 10 different banks were asked for an answer, there would be eight or nine different answers. Unfortunately, the past four years of Kaizen鈥檚 assurance testing have proven this hypothesis to be true.
The process of requiring firms to provide subjective fields and fields with multiple permissible answers without further detailed guidance or reporting instructions is problematic. This is most evident where not only are ISIN codes required to identify collateral or loaned securities, but reporting counterparties are also called upon to provide CFI codes, credit quality, LEI of the issuer, the jurisdiction of the issuer, collateral/security type and the maturity date of the security as well.
Word has it that the savvy national competent authorities disregard this data anyway on the grounds of its inconsistent and low quality.
What is next?
We are entering a period of significant change in the money markets and securities financing regulatory reporting space. Extraterritoriality in the FINRA SLATE rules for US securities lending, the likelihood of growing requirements in Europe in the SFTR Review/Refit, further new but smaller requirements for uncleared bilateral repo reporting to the OFR in the US, and the potential for further global and European divergence, are all likely to feature over the next couple of years.
This is on top of the ever-present danger of stricter enforcement of SFTR, MMSR, and Sterling Money Market Daily (SMMD), as well as the likelihood of tangible fines re-emerging.
July鈥檚 Money Market Statistical Reporting (MMSR) extended scope is followed by the US Office of Financial Research (OFR) Uncleared Bilateral Repo reporting in December, the SFTR Review/Refit is likely to commence in 2025, and US Financial Industry Regulatory Authority鈥檚 (FINRA鈥檚) Securities Lending and Transparency Engine (SLATE) reporting goes live in 2026.
Back in 2015, when the Financial Stability Board (FSB) published 鈥楽tandards and Processes for Global Securities Financing Data Collection and Aggregation鈥�, the principal focus of all securities financing reporting regimes was in identifying global systemic risks in SFT markets and nipping them in the bud before they potentially seeded the next financial crisis.
These were different times 鈥� 'Brexit' was not yet in the vocabulary, and the regulatory reporting fines from regulators such as the UK Financial Conduct Authority (FCA) were mounting up. Since then, notably in the securities financing space (seen as one of the unfortunate bedrocks of the crisis) and following SFTR implementation and similar regulations in jurisdictions such as Japan, it has been a sea of calm and light-touch regulation, certainly from an enforcement perspective.
We are starting to see signs that the regulatory pressures are building again, with the introduction of many new regulations, re-writes, re-fits and changes, together with national competent authorities and the central European regulator, the European Securities and Markets Authority (ESMA), which simply cannot continue to cry wolf. To call out failures to close out open term securities loans three years in a row in its 2023 report on the quality and use of data, and not take punitive action, is really testing the patience of the national competent authorities.
SEC goes global
The US has been very slow to fully embrace the full spectrum of SFTs captured by regulatory reporting requirements such as SFTR (all repos, both cleared and uncleared, all buy-sellbacks/sell-buybacks, all securities lending and borrowing transactions and all margin loans entered into under a prime brokerage agreement).
While US triparty repo has been captured by the Federal Reserve Bank of New York from the clearing banks, BNY, and JPMorgan Chase, and cleared repo data has been extracted from the Government Securities Division (GSD) of the Fixed Income Clearing Corporation (FICC) since 2010, the other SFT products are clear gaps. Notably, there has not been any reporting of the uncleared bilateral repo market or securities lending market.
A trade reporting obligation
The US Securities and Exchange Commission (SEC), while late to the party with securities lending reporting, has taken an entirely different tack in framing this as a trade reporting requirement, rather than transaction reporting for systemic risk purposes.
When the SEC鈥檚 Rule 10c-1a was put to public consultation, it received more than 2,000 responses. Retail investors were demanding fairness, checks and balances, and controls to be put in place around short selling and the securities lending market that facilitates hedge fund equity market plays. Several stock market scandals have left their scars on the market and finally the SEC has decided it is time to act.
Vast expansive scope
One of the key principles of the FSB鈥檚 framework was that reporting would be collated regionally before being shared globally, in order to identify systemic risks evident in a G-SIBs鈥� global portfolio, not just the operations in a single jurisdiction.
There was a great deal of concern about double counting. If SFT activities were captured in one jurisdiction, they should not be captured and shared in another jurisdiction, thereby overstating the risk. Despite this and with fairness in mind, the SEC does not see it fit to treat non-US residents any differently when it comes to trade reporting obligations.
Given the predominance of US stocks and securities and the prevalence of foreign holders of US stocks particularly in the tech space, this requirement, if followed through with, will result in a vast expansive scope for any lenders of US securities to report, regardless of their jurisdiction or domicile.
Enforcement
You might ask, how can FINRA and the SEC enforce such widespread compliance globally with SLATE reporting?
This question is still to be answered, particularly regarding timeliness of reports in very different time zones. Nevertheless, FINRA and the SEC could attempt to monitor securities settlements, however, making the distinction between outright cash sales and purchases and loans will still be a significant challenge.
Additionally, if the loan is covered by an internal move within the depo of a major financial institution, then this move to cover a short will not be transparent other than to the depo account holder. While all US securities, regardless of where they settle 鈥� either domestically, through International Securities Depositories (ICSDs), or central securities depositories (CSDs) 鈥� will be subject to cross border cooperation and US registers, FINRA may need to leverage existing reports such as agent lending disclosure to uncover otherwise hidden securities loans. However, potentially, FINRA may have unwittingly bitten off more than it can chew if it expects to have full international compliance on day one.
Indeed, this super-equivalence, which demands that international market participants submit reports to FINRA in the US, does not exist for US firms entering into SFT transactions elsewhere in the world. This would be unlikely to engender cooperation, if the ask is to leverage SFTR reports that would identify US securities being loaned by European market participants in the absence of this definitive information elsewhere.
More reportable fields
Nevertheless, the pressure is on, the number of reportable fields has swelled from 12 data elements to up to 48 fields, and a rather complex web of intraday activities and lifecycle events are required to be reported. It may simply act as the ultimate recruiting sergeant for US agent lenders to wrap up this market on the promise that they will make the necessary reports to FINRA for lenders on behalf of beneficial owners.
OFR uncleared bilateral repo reporting
Barely before the ink has dried on the FINRA SLATE consultation response, the OFR鈥檚 non-centrally cleared bilateral repo data (NCCBR) reporting will commence for the largest brokers and dealers from 2 December 2024. Other significant financial companies in the US non-centrally cleared bilateral repo market will follow in April 2025.
The OFR requirements are comparatively straightforward, albeit, following an extended period in which there were no hands-on SFT reporting requirements in the US at all.
Reporting firms are required to submit up to 32 fields of data by 11:00 on trade date plus one (T+1) in a user-friendly csv or txt format to the OFR鈥檚 Data Collection Utility.
The only lifecycle or action type required is the need to resubmit a day鈥檚 complete submission should OFR enquiries result in the identification of an error.
This approach to regulatory reporting is rather refreshing and most in line with the original 2015 FSB鈥檚 proposals. In 32 fields, the regulators should have a clear view of potentially systemically significant uncleared bilateral repo market positions.
However, there are a couple of notable omissions with the lack of any provision for bilateral margin and variation margin reporting that typically takes place at the portfolio rather than transaction level. There does not appear to be scope for collateral re-use reporting either.
More is more
The mood music in Europe still appears to be playing the tune of 鈥楳ore is More鈥� when it comes to regulatory reporting. The European Market Infrastructure Regulation (EMIR) Refit was the ultimate case in point. Despite the Regulatory Oversight Committee (ROC) producing 鈥榦nly鈥� 110 Common Data Elements (CDE) for adoption in derivative reporting regimes globally, they still found it fit for EMIR to swell from 129 to 203 fields.
There are a number of elements of the EMIR Refit that are likely to be discussed as possible SFTR additions. These include:
鈥� Executing Agent Field 鈥� its current absence causes a lot of pain in the trade repository reconciliation process and other fields such as agent lender or broker as misused in its place.
鈥� Effective dates 鈥� such that pre-agreed changes to trade economics can be reported as soon as agreed rather than needing to be delayed.
鈥� Intra-group identifier 鈥� reducing the burden on regulators to identify inter-group transactions and book transfers.
鈥� Incorporating bilateral variation margins together with CCP margins in a single data table to simplify the margin reporting process and ensure higher levels of compliance. At present, the margin table is solely for reporting CCP margins. Bilateral variation margins must be reported using an intricate collection of collateral updates, with and without unique trade identifiers (UTIs) and is frequently under-reported or misreported.
鈥� Post-Brexit waterfall structure for the generation and sharing of UTIs when trading cross-jurisdiction. At present, the rules governing the generation and sharing of UTIs only apply within a single jurisdiction, not when trading across jurisdictions, causing confusion, operational pain and late reporting.
鈥� Additionally, event types complementing certain action types,聽package identifiers聽(useful for identifying products such as collateral swaps) and the聽requirement to report the nature and corporate sector of the other counterparty in addition to the reporting counterparty may also be incorporated.
Global securities financing regulatory reporting timeline
While I would argue that additional fields such as executing agent and effective dates make a lot of sense, together with a rationalisation of margin reporting, it would be good to see ESMA and the FCA being bold and willing to withdraw certain fields too.
The author highlighted to the assembled group of global regulators at the FSB in 2014/2015, that for many of the instrument reference data questions, if 10 different banks were asked for an answer, there would be eight or nine different answers. Unfortunately, the past four years of Kaizen鈥檚 assurance testing have proven this hypothesis to be true.
The process of requiring firms to provide subjective fields and fields with multiple permissible answers without further detailed guidance or reporting instructions is problematic. This is most evident where not only are ISIN codes required to identify collateral or loaned securities, but reporting counterparties are also called upon to provide CFI codes, credit quality, LEI of the issuer, the jurisdiction of the issuer, collateral/security type and the maturity date of the security as well.
Word has it that the savvy national competent authorities disregard this data anyway on the grounds of its inconsistent and low quality.
What is next?
We are entering a period of significant change in the money markets and securities financing regulatory reporting space. Extraterritoriality in the FINRA SLATE rules for US securities lending, the likelihood of growing requirements in Europe in the SFTR Review/Refit, further new but smaller requirements for uncleared bilateral repo reporting to the OFR in the US, and the potential for further global and European divergence, are all likely to feature over the next couple of years.
This is on top of the ever-present danger of stricter enforcement of SFTR, MMSR, and Sterling Money Market Daily (SMMD), as well as the likelihood of tangible fines re-emerging.
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