What are the key takeaways that your clients should consider about the SFTR final standards?
The adjustments made between the initial ‘Level 1’ text and the publication of the final standards for Securities Financing Transactions Regulation (SFTR) show that the European Securities and Markets Authority (ESMA) approached the process pragmatically and listened and responded to the industry.
This is most evident with the change of collateral reporting to S+1.
Clients will be assessing the impacts of the changes to the structure and number of reconcilable fields and whether they will be in a position to report directly themselves. For some, it may make sense to leverage established links to trade repositories (TRs) and manage the reporting in-house.
Others will look to third-party providers to offer a scalable, multi-asset-class solution that will offer a more cost-effective approach with regard to one-off setup and ongoing maintenance costs.
The requirements that remain unchanged are also noteworthy, notably the process for unique transaction identifier (UTI) generation. I’m sure many of our clients are only too aware that the biggest ongoing challenge for European Market Infrastructure Regulation (EMIR) has been establishing and maintaining a robust industry-wide UTI and timestamp generation process.
The UTI underpins the ongoing reporting requirements during the lifecycle of the trade. It also ensures that the trades and collateral can be linked together and are maintained within the regulatory structure.
The further importance of this process can be seen as we look at the disclosure and allocation model, which is likely to undergo changes and developments over the next few years. The potential availability of granular information regarding beneficial owners at point of trade, and the way in which undisclosed trades are reflected, may change the booking model for securities finance transactions going forward.
EquiLend is keen to assist clients in considering the implications and to provide a solution that maximises the benefits for both sides of the transaction.
Leveraging existing Next Generation Trading (NGT) functionality allows us to create a solution that has the potential to create a new agency lending disclosure process while also helping clients manage capital requirements more effectively and price trades more efficiently.
Was there anything unexpected or of particular note that was changed between the previous version and the final?
The industry welcomes the collateral reporting requirement change and acknowledges that ESMA reacted to the concerns raised by industry bodies such as the International Securities Lending Association, the International Capital Market Association and the Association for Financial Markets in Europe. Anecdotal evidence had suggested that there would be no change to the reporting timeline, but it is encouraging to see that the efforts of the various industry bodies have borne fruit.
Throughout the industry, a profound shift is underway in the management and usage of non-cash collateral, and as complexity increases, clients will need to ensure that adequate, scalable models are in place to ensure collateral allocations are attributed to the relevant UTIs within the mandated timelines. That may require a change to the existing booking model and account structure within the triparty agents, or require the triparty agents to develop their product offerings to accommodate the changes.
The UTI generation and communication process remains the cornerstone of success for the reporting process, and EquiLend is utilising existing functionality to provide a low-impact solution for clients. By helping to provide a clearly defined, industry-wide standard for UTIs and execution timestamps, EquiLend’s NGT and post-trade suite will provide certainty and reliability from the outset of the trading process through the completion of all lifecycle events.
How will EquiLend’s offering tackle the reporting requirements of SFTR?
Industry bodies, regulators and vendors all recognise the importance of a robust UTI and timestamp generation process as the foundation its reporting regime. At EquiLend, we have been working closely with our clients to discuss and agree the necessary adjustments to the NGT protocol, which will allow us to provide a solution whereby NGT provides the optimal location for the generation of the UTI across the market. Risk management is a key element here as is acknowledging that volumes will increase by multiples of current flows. Clients are looking for automated solutions to provide the allocation break out and bookings, with a point-of-trade solution being the preferred option. Again, NGT is naturally aligned to be the ideal destination for this.
The securities finance industry has experience in using vendors for lifecycle trade management, and we expect this to continue and expand as firms will look to provide matched records when reporting to TRs. EquiLend’s real-time post-trade suite (including unified comparison, our multi-asset matching and affirmation product) will allow clients to proactively manage and match the trade lifecycle events, putting clients in control of the process by which they can work to submit matched data across all the 90+ reconcilable fields. Finally, vendors also need to provide a full, cost-efficient, multi-asset solution that will encompass data enrichment and reporting solutions for those clients who are looking for a one-stop, third-party solution. By offering a flexible, modular solution, EquiLend will cater for all the various levels of service required across its diverse client base.
What should your clients be doing to prepare?
Clients need to learn the lessons from EMIR and ensure they are not repeated. This requires mutual agreement on some fundamental areas, and the UTI management is a classic example of that. Clients also need to consider the value chain and identify where the bottlenecks/challenges will be. By engaging with industry bodies and directly with vendors early in the process, clients can avoid fragmented processes that give rise to inefficiency and increased costs. We offer a data gap analysis tool, which we will share with clients over the coming weeks. This will help all parties to identify what gaps exist and how we can work together to close them.
Finally, clients should assess the costs both in terms of building and maintaining a scalable solution. Regulatory reporting will only increase in size and scope, and having a transferrable solution can only be of benefit.
Is the industry as prepared as you would like it to be at this stage?
Clients now have more certainty around the deliverable dates for SFTR and have the opportunity to plan accordingly. The industry bodies have been very vocal in discussing SFTR and its impact, and, overall, a good start has been made.
EquiLend has hosted a number of workshops with clients, discussing operating model changes, various options and some potential benefits that may accrue to clients as they contemplate how to address the requirements. All of this information will help clients to be appropriately prepared to live.
The biggest challenge is managing all of the different global regulatory initiatives that clients are facing right now. The second Markets in Financial Infrastructure Directive a huge task for most firms, and clients are currently focused wholeheartedly on this. The EMIR amendments in November are another additional distraction for SFTR project teams.
Clients that have centralised their SFTR solution need to be mindful that these shorter-term objectives do not mean that purely tactical solutions are provided for SFTR. We, as an industry, have an opportunity to make strategic changes that could take the market to the next level of sophistication, efficiency and profitability.