SFTR: The end of the beginning
Getting to the final technical standards may indeed just mark the end of the beginning, but it is a significant milestone on this particular road. David Lewis of FIS Global maps out the rest of the journey to be made
The European Securities and Markets Authority (ESMA) issued the final technical standards for the Securities Financing Transactions Regulation (SFTR) on 31 March 2017, under which the industry will have to report all its transactions to a registered trade repository. The road to this point has been a long one indeed, but 31 March did not mark its finish. In fact, as Winston Churchill said in 1942: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
While there has been a great deal of work done so far by providers such as FIS Global, the final technical standards confirm what we all need to do to now to meet the new regulations coming into effect in Q3 or Q4 2018. While the various institutions in the EU go through their approval processes, technology solution providers are already working hard to develop the necessary systems to meet their client’s requirements in order to roll them out in time to be live by the reporting launch date.
ESMA has chosen to gather much more data and at a greater frequency than is actually required by the Financial Stability Board (FSB), as the FSB gave each jurisdiction free rein as long as the minimum requirements were met. There is going to be a great deal of data that will need to be marshalled, cross referenced, organised and delivered in order to meet the detailed demands from ESMA. Despite the requirements being double-sided in nature, where both the lender and the borrower must submit their own trade and collateral data, the demand for data weighs disproportionately on the lenders. Technically, the lenders are the principals to the transaction and will commonly be the beneficial owners at the start of the transaction chain, but they will, with few exceptions, delegate this responsibility to their agents.
Those agents will not just be tasked with submitting their own client’s data, but will need to share that data with their borrower counterparts in order for them to meet their own reporting obligations within the set timeframes. Such data will include the underlying counterparties and details of how bulk trades and collateral were allocated. Due to the simple fact that the lender, or more accurately, its agent, is in possession of the lion’s share of the data required for meeting the requirements of SFTR, they will play a significant part in the process with the intention that all parties can efficiently meet their regulatory obligations.
At this point it is key to understand exactly what meeting that obligation entails. ESMA requires all market participants to submit their trade and collateral data, at the end of T+1 and S+1 respectively, to an approved trade repository. While this is going to be a complex requirement to meet, particularly with regards to collateral details and trade allocations, amendments and all the other reportable lifecycle events, it should not be over engineered. The potential costs of over thinking this requirement, especially in an industry already facing rising cost pressures all along the transaction chain, are significant.
Trade repositories charge for their services. Although these charges are strictly controlled by ESMA, they will not be insignificant as those reporting under the European Market Infrastructure Regulation (EMIR) can testify. Part of the services they provide are the matching of trades with those provided by your counterparty, whether to the same trade repository or another. The FIS solution, matching our global footprint with our partner trade repository, will simplify this section of the process significantly. ESMA, in the final technical standards, has realised that it has set the industry a tough task with the number of matching fields in the data extracts it requires, and as such, ESMA has relaxed some tolerances and indicated that many of the matching fields will not need to be matched during the first two years of operation, as all of the participants in this programme get used to the new reporting regime.
This is both pragmatic and sensible of ESMA, particularly given the difficulties that those reporting under EMIR have faced. Further, the International Securities Lending Association (ISLA) has been doing some excellent work in looking to combine the efforts of all the technology providers that are stakeholders in this process. We all have clients to serve and our industry will be best served by delivering a service as simple, cost effective and reliable as possible. This work has extended to include agreed formats for data fields where there is some latitude given in the ESMA technical standards, and, once agreed, it is to these standards that FIS and no doubt other trading system providers will code extracts to.
ISLA has also importantly suggested a draft protocol for the generation of unique trade identifiers (UTIs). Getting this right, and there is work to do on it yet, will ensure that the existing processes employed by the licensed trade repositories will deliver an efficient and timely matching process, without the need for costly third parties duplicating this process, delivering compliance reports and exceptions back to their clients.
Getting to the final technical standards may indeed just mark the end of the beginning, but it is a significant milestone on this particular road. Ahead of us lies the actual build and release of new reporting technology and, arguably more importantly, some industry defining moments as we consider how best to approach the next few years. It is entirely possible that some of the paradigm shifts in counterparty disclosure and the potential changes in loan allocations based on the borrower’s risk weighting of the underlying lenders will change the shape and process of our industry as we go forward, and likely for the better. One eye will have to be kept on the lookout for further legislation, of course. It is not unreasonable to expect that ESMA, and indeed the FSB, will be planning to do something with the massive amounts of data that they gather and the insight it brings them, however, such changes may be many years away yet.