What has been the impact of the delay in SFTR implementation?
Brian Lamb: The delay has given market participants an opportunity to review more thoroughly their booking and operating models, and identify key areas they need to address, in order to complete the accurate reporting of transactions. It has also allowed firms to look at the reporting options available to them and has given them more time to assess whether to build versus buy a Securities Financing Transactions Regulation (SFTR) solution.
EquiLend’s solution takes a modular approach, in that we can support clients with as much or as little of the SFTR process as they require. Clients that have existing regulatory reporting engines may only need our matched transaction data and handle the rest of the process themselves. Others may need us to match and enrich the transaction data and transmit it to a trade repository for them. Others may need a combination of the two approaches depending on the department or asset class traded. We are here to support all clients regardless of their approach to SFTR.
Do firms need a vendor for SFTR? Can’t they do it themselves?
Lamb: SFTR is more than just a simple reporting issue. It requires firms to supply a number of matched fields that need to be agreed with their counterparties. The best way to do this is at the point of trade, which is offered by the EquiLend solution. Using a market vendor will support firms in submitting more accurate data. EquiLend offers matched transactions at the point of trade, and provides unique transaction identifiers (UTIs), time stamp execution and full lifecycle management of the UTI. This allows us to support the securities finance community with a compelling, one-stop solution to SFTR.
Why is everyone talking about unique transaction identifiers?
Lamb: Back in September 2014, the Financial Stability Board Aggregation Feasibility Study concluded that UTIs, as well as legal entity identifiers (LEIs), were critical for any aggregation option. To support the use of UTIs, the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions released earlier this year technical guidance on the Harmonization of the Unique Transaction Identifier. So for firms, the UTI is becoming increasingly important to comply with transaction reporting obligations. It is no different for securities finance transactions, and with UTIs critical in the process of transaction reporting, it is understandable that firms are very focused on their generation. As a trading venue, EquiLend is ideally positioned to generate UTIs and support the lifecycle management via our post-trade tools.
With the volume of data required in SFTR, should firms be concerned about the security of their data?
Lamb: Data security is absolutely a concern for all firms, especially as many firms are submitting data on behalf of clients. SFTR mandates that firms involved in securities finance supply a large swathe of information about their transactions to regulators. Firms need to have confidence that their data will be protected by all third parties, such as vendors and trade repositories. As a regulated entity in multiple markets around the globe, EquiLend is used to handling and securing sensitive client information and has rigorous controls, procedures and systems in place aimed at protecting the best interests of its customers. We have rigorous oversight by regulators in jurisdictions all over the globe, including the UK and Europe. Clients can be confident that the duty of care EquiLend owes to its clients, under both the legislative and regulatory regimes, ensures that their data is carefully managed and secure.
Is SFTR a burden or an opportunity?
Lamb: We have had many conversations with clients that are looking at SFTR as an opportunity to have a full review of their processes and market infrastructure relating to securities finance transactions. This will allow firms to potentially benefit from greater synergies across their product lines; reengineer existing processes; gain greater efficiencies; and to centralise and standardise to bring greater structure to their business, front to back. Despite the additional costs that clients will inevitably incur to meet their SFTR reporting requirements, we believe the benefits mentioned should allow firms to benefit from an overall cost efficiency.
How can firms leverage their MiFID II and EMIR reporting experiences to prepare for SFTR?
Christophe Roupie: There is a consistent message from the European Securities and Markets Authority (ESMA) that it has intentionally tried to lessen the burden on firms through the alignment of reporting requirements as much as possible across the different regulations.
We have seen this with the latest revisions to the European Market Infrastructure Regulation (EMIR), which are due to go live in November this year, as well as the general similarities between EMIR and SFTR.
Although alignment of the regulations isn’t always 100 percent, there are a number of lessons that the industry can learn from the impending second Markets in Financial Instruments Directive (MiFID II) implementation, as well as the experience from EMIR. Taking three areas as examples: instrument reference data, counterparty data and operations models.
MiFID II mandates the use of international securities identification numbers (ISINs) for the purposes of trade and transaction reporting. This has driven solution providers in the regulatory reporting and data space to provide enrichment services that can be used under SFTR. Problematic fields such as CFI codes (for classifying financial instruments), LEI of issuer and quality of security can all be enriched through comprehensive data sets that both reporting firms and vendors have developed in response to MiFID II. This is certainly an area that we are actively reviewing.
For counterparty data, EMIR and subsequently MiFID II have initiated and extended the use of LEI codes. This means that the programme teams of SFTR reporting within individual reporting firms should look to their existing counterparty static data, which should already have a large amount of the LEI mappings completed. Lastly, for firms that have previously not had a transaction reporting obligation, MiFID II, and to a certain extent EMIR, has forced firms, notably the buy side, to begin to build out their operational teams to provide oversight and management of their multiple transaction reporting requirements. These same teams will be invaluable post-SFTR implementation.
Which asset class has the most ground to make up ahead of SFTR?
Roupie: The multitude of actors involved in the securities financing trade lifecycle mean that each asset class has its own challenges. Having said that, the bilateral repo area is particularly manual. Setting aside all of the transactional data points required for SFTR, simply agreeing and providing a UTI to your counterparty when there isn’t an electronic execution or confirmation makes for a particularly onerous operational process. SFTR should encourage firms to automate their processes and match electronically, avoiding the inherent challenges of manual processes currently in place such as updates sent via fax.
What does SFTR mean for the buy side?
Roupie: As with the other transaction reporting obligations set out under EMIR and MiFID II, SFTR is bringing new obligations to the buy side. Ultimately, this means that they will need more sophisticated data management and operational processes in place, as well as larger teams to implement and oversee these processes. At a time when most firms are looking to reduce costs, this can be a real challenge. Working with firms such as MarketAxess and Trax that have the expertise and technical capacity to help manage some of that burden is key.