Taking the strain

Industry experts from across the transaction chain outline the cost of SFTR’s reporting standards from both a technological and financial standpoint, and discuss possible solutions

The SFTR reporting requirements are significantly burdening the business—do you agree, and why?

Garrett Berkery
Vice president of securities lending
risk management
Brown Brothers Harriman Investor Services

The Securities Financing Transactions Regulation (SFTR) will impose a significant burden on the industry—but the challenges are not insurmountable. Based on the draft technical standards (DTS) the scope of the required data fields is expansive.

However, much of this required data is not customarily stored at transaction level—such as governing contract details. Even with vendors mobilising to offer solutions to industry participants, the requirements make it likely that an in-house development will be necessary, whether partnering with a vendor or not.

In addition, the number of fields that need to match to fulfil the dual-sided reporting mandate is significant, and far more than under European Market Infrastructure Regulation reporting.

It will be interesting to see what steps might be taken to better ensure that reported transactions match prior to submission to the trade repository.

Overall, despite the expectation that SFTR will result in significant costs to achieve compliance, it is hoped that the benefits of improved transparency to regulators will strengthen confidence in the business and drive future growth.

Ross Bowman
Business development, securities finance
BNP Paribas

Most financial regulations, are drafted, debated, consulted, challenged, re-drafted and reviewed, until they are either etched in stone, or implemented as ‘principles’ or ‘guidelines’, the interpretation of which is then hotly debated for some time after. SFTR is no exception. It is a far reaching set of regulatory obligations and practical requirements with an exceptionally wide blast radius, affecting the vast majority of SFT market participants.

If the underlying aim of the regulators is to gently guide the market towards being centrally cleared, executed through a recognised trading venue, and priced using transparent and publically quoted benchmarked rates, SFTR is a key piece of a much bigger puzzle and comfortably sits alongside other regulatory requirements.

Anyone who has laboured over the vastness of the SFTR text will have a good appreciation of the challenges ahead. Game-changing the rules might be, insurmountable they are not. Its implementation will require industry-wide coordination of lenders, agents, borrowers, market utilities and system vendors coordination to ensure whatever solution is delivered addresses the requirements of today, and remains ‘fit for purpose’ going forward.

Nerin Demir
Head of repo and securities finance
SIX Securities Services

It is obvious that SFTR, especially the reporting obligations, will absorb vast resources. The conundrum behind solving this, to some degree, is the indifference towards the nature of affected business models.

The lifecycle management of repos and the resulting reporting requirements should not apply in the same way to an agent lender, for example, as the potential conclusions as a result of the collected data might potentially be misleading.

The attempt to collect data down to the transaction level of the collateral along with the link to the original transaction may cause operational constraints in a trade lifecycle, such as for substitutions.

As a triparty provider, we sympathise with the thrust of the industry to liaise with financial market infrastructures for reporting purposes and are prepared to support our non-Swiss participants.

Ed Oliver
Managing director

SFTR is going to take resources over the next two years, but it is a necessity. If the industry does not get it right, then the beneficial owners, that are responsible for the regulatory reporting, may review their participation in securities lending and could decide that they can’t continue. However, I am encouraged by the recent developments of the data vendors that are working to come up with solutions as well as the industry’s appetite to seek standardisation.

These efforts suggest that industry participants are figuring out what they do well, linking up with others that can supplement their capabilities, and coming up with cost-effective, efficient solutions. It will take some effort and will involve lots of testing, but we don’t have a choice, this needs to be a success. The other burden on the industry is the cost of the solution. There is no extra money to be made by this reporting—it is a direct additional cost—so, cost-effective, scalable solutions are the key to success.

Manuel Leveque
Equity finance trader

SFTR represents a major challenge for CACEIS and the industry as a whole.

SFTR increases the operational burden, requiring the generation of highly detailed reports that must be submitted to the regulator. All of this demands close coordination between a large number of teams from across the group’s operational, IT and legal departments.

Looking at SFTR in more detail, we are required to fill out many data fields for each transaction, with mandatory reporting on the trade date, and additional reporting for all repositories.This again requires the creation of dedicated IT system interfaces to ensure the information is accurate and timely, and is routed to the correct recipient or database.

Despite the obvious administrative burden, CACEIS is taking part in this initiative that aims raise the level of transparency for both clients and regulators.

Gregory Froehlich
Trader, equity finance

The equity finance business has seen the amount of single operations over the past year increase significantly. Furthermore, the constant increase of triparty business has generated even more important collateral flows on the back of the principal trading.

SFTR requires each counterparty to report many trade parameters on thousands of daily flows and these parameters require matching with the counterparty in a very restrictive timeframe. We are talking about huge reporting constraints. As banks are running long-term cost controlling policies, the management of these constraints will be more than likely outsourced to post-trade service providers in collaboration with the third party collateral managers.

This move, in my opinion, will push even more, toward the trend of banks delegating post-trade to external providers, some of which are also able to supply trading platforms (with the aim to consolidate reporting, matching and trading tools).

These service providers have perfectly understood the impact of SFTR in terms of IT constraints for banks and are already moving to grab their piece of the pie.

Paul Wilson
Global head of agent lending product and portfolio advisory, investor services
J.P. Morgan

Implementing SFTR will be challenging for all participants—beneficial owners, agents and borrowers alike. It will require structural changes to the way business gets transacted, and some beneficial owners that on the face of it would appear to be out of scope may also be indirectly affected.

Some may see SFTR as being incompatible with certain current market practices. It will require higher levels of cooperation between participants who will need to work together to adhere to the requirements.

As a first step, the industry needs to develop a common set of principles and operating guidelines that act as a baseline for all participants to work from—this could mean standardised protocols and data reporting standards. There is certainly a consensus that improved reporting and transparency will be beneficial to the reputation of the SFT industry, and with added cooperation of the market participants, it is possible over the longer term to even have a positive impact on the industry, too.

Sunil Daswani
International head of securities Lending and capital markets client servicing (EMEA and APAC) Northern Trust

SFTR imposes two obligations: greater disclosure of lending activity by entities and the reporting of SFTs themselves to designated trade repositories.

The reporting requirements are initially going to burden the industry as each market participant develops the solutions required. While the regulations dictate the ultimate responsibility for SFTR reporting is with borrowers and beneficial owners, we recognise our responsibility to our clients, as the agent lender, to alleviate this burden.

Generally, challenges are expected during the implementation period, specifically as related to efficient communications between systems for agent lenders and borrowers regarding timing and demands of the available data. Industry-wide discussions on the mechanics of implementation are ongoing.

Northern Trust is actively engaged in those efforts and intends to provide the necessary support to facilitate required reporting under SFTR.

Clearly, there is a technology spend to comply with SFTR. Where appropriate, we are working together with industry groups towards a consistent and efficient industry-level approach. With this aim, Northern Trust is talking with many fintech companies to see if blockchain technology may be a benefit from reduced reconciliations across the board that may arise with the implementation of SFTR.

Mark Tisi
Head of EMEA client service
Deutsche Bank

While SFTR is being implemented in phases, the most significant one is, of course, Article 4. This creates significant data and technology challenges for the industry, especially when reviewing the draft regulatory technical standards (RTS). These standards include an inordinate number of required fields and even new fields that are not routinely used in participant systems or, in certain cases, not used at all today, such as is the case with unique trade identifiers and timestamps.

The level of resources and cost that agent lenders like ourselves will need to devote to this initiative cannot be underestimated.

While the reporting obligation does not technically belong to the agent lenders, beneficial owners would certainly be reliant on their agent lenders to provide data to them if they were in a position to report themselves.

However, this could create a significant overhead for beneficial owners that only participate via their agent programmes. Logic would then follow that the agent is in the best position to assist clients with their reporting obligations, otherwise the risk is that that certain participants simply decide the burden is too much and withdraw from the lending markets, which is not a good result for anyone.

At Deutsche Bank, we have been actively following and participating in industry developments for some time and we have responded to the various discussion papers and consultations. We are also reviewing all of the external solutions that are being offered.

We will continue to engage with our clients and work towards a solution or solutions for our clients and for Deutsche Bank.

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