You were recently in North America to discuss SFTR. What was the market view?
We’ve recently started hiring in the US and it’s a market that will continue to be at the centre of our focus. With regards to the Securities Financing Transactions Regulation (SFTR), the reality is starting to dawn. The market is beginning to appreciate that firms need to identify in scope entities among their counterparties. There will be a need to provide additional information to enable their counterparty to report. US lenders, lending on behalf of a US fund, still need to provide legal entity identifier (LEI) information and the allocation breakdown to an EU borrower in order to satisfy T+1 obligations. This inevitably means process and technology changes even for entities that are entirely out of scope. Given potential process changes and a more timely data set the current agency lending disclosure (ALD) model could in fact be overhauled.
Further, the Financial Stability Board (FSB) wants unique trade identifiers (UTIs) to be the global standard for all transactions. The assumption then follows that the US and Canada (as members of the FSB) will follow suit and issue similar rules at a later date. Obviously, we live in an ever-convergent world and there is clearly an impact on the US here—this is something the firms we spoke to appreciate. This is also why we consider it so important that our SFTR solution be future proof. The data architecture utilised by our solution has the flexibility to suit any transparency/risk reporting needs that may be required by the securities finance or repo industry in the future.
SFTR is just the latest regulation to come to us down the conveyor belt, but when you add up the sum of all parts some institutions involved with the lending of securities might be inclined to reconsider their involvement with the market rather than face compliance with this ever-mounting stack of regulation. SFTR could be the catalyst for certain beneficial owners to exit the securities lending market, in particular those who don’t view the activity as a core revenue stream rather a form of enhanced custody. What we saw in the US is the industry is increasingly turning to vendors such as Pirum, with its pedigree in post-trade automation and ever growing role as a connectivity hub to help ease this continuing burden.
The other concerns we heard were around the failure of US lenders to supply all the required information to EU counterparts in a timely fashion and this leading to US lenders being deprioritised by EU counterparts. Importantly, there are also interpretation issues with regards to the margin lending activities of prime brokers. There’s really two issues here: firstly, increased reporting requirements for financing supplied to hedge fund clients; and secondarily, there remains some ambiguity around whether the movement of securities to the hedge fund for short coverage is a reportable transaction in its own right. This is a point that US prime brokers are seeking clarification on.
What about S+1 collateral reporting requirements? Would the initial trade be reported T+1 (without the collateral data), and then the collateral information would be provided S+1 (which presumably is a later date in non-US trading markets)?
The European settlement model differs somewhat from the US. The EU model is generally one of T+2 settlement.
Where non-cash collateral is being used the actual securities delivered would not be allocated until settlement date. Hence the need for reporting of transaction on T+1 and allocated collateral on S+1.
It is worth noting that for certain transactions such as repos, the European Securities and Markets Authority (ESMA) would expect both the transaction and the collateral on T+1 regardless of the settlement date.
Does knowledge of EMIR implementation help with SFTR?
The European Market Infrastructure Regulation (EMIR) preceding SFTR has been hugely beneficial for the market as a whole. The industry learnt a number of lessons from what went wrong. We would highlight:
Rushed implementation before the reporting deadline
Lack of agreed industry protocols (UTIs as an example) that underpin the reporting requirements
Very low pairing and matching rates
Pirum have addressed these issues in our service offering. We’ve been engaging with our customers for some time now, to avoid the last-minute rush. It’s important to also note that with regards to learning, it’s not just the firm’s experience but ESMA’s that has shaped the final regulatory technical standards. The regulator has been more transparent and more communicative this time around. There has been a noticeable effort to learn from mistakes, which have been rectified in SFTR.
Are there any outstanding interpretation issues under SFTR, such as questions relating to the scope of the regulation, trade reporting fields and timing issues?
Yes. Timestamping is a good example of this, as it is something that does not exist in the current market standard process.
The UTI generation point—the point at which UTI is applied to transaction—is open, however, the Pirum/Markit solution anticipates and deals with this. Our solution does not aim to stamp each trade with a UTI but ensures all trades that require one have a UTI stamped. Our solution anticipates and accommodates UTIs being stamped upstream to Pirum, for example, by an electronic execution venue or as part of a novation to a central counterparty.
When will a corporate action result in a UTI creation?
Effectively, if a corporate action creates a new position (such as a rights issue), then that position becomes a new transaction to report, so it will need a UTI.
What fields will an out of scope entity be required to provide?
We don’t have a definitive list, however, the minimum requirement would be enough information for the in-scope entity to identify its version of the trade (so at least standard entry class code, quantity, trade and value date, rate, and so on), plus its LEI or the LEI of the beneficial owner in the case the out of scope entity is an agent lender. It is also worth pointing out that for the agent lender example, it will have to repeat the exercise when the collateral is received and give the borrower a breakdown of the collateral by beneficial owner.
Do you anticipate any issues with all the trade reporting information to be available by T+1? What are the ALD issues currently being raised by the industry?
The European settlement model differs somewhat from the US. The EU model is generally one of T+2 settlement.
In the agent lender model, information for principal allocation is currently only made available to the borrower via the ALD process post-settlement date. In the new post-SFTR model, this information will be required on a T+1 basis.
The current ALD model, which is heavily used within the US, could be overhauled or replaced, given that it doesn’t provide the necessary information in sufficient time for the SFTR reporting requirements
A primary example of a change would be LEIs replacing the use of tax codes in the ALD model.
Are SFTR work streams tying into wider MiFID II/MiFIR work streams? If not, should they?
Yes and no. The second Markets in Financial Instruments Directive (MiFID II) of course reaches further than SFTR—transaction reporting is just one of the aspects of MiFID II. However, for SFTR, this is more complex than the requirements under MiFID II, so it makes sense to digest both requirements in tandem to see where there is overlap. What is clear is that MiFID II obligations still consume a lot of resource at our customers.
There’s more focus on MiFID II than SFTR right now. SFTR demands attention, however, and we are starting to see increased focus on the project by customers.
Customers looking at MiFID II can also leverage the understanding they have gained of things such as where various data points are held and this knowledge can be re-deployed for SFTR. A holistic regulatory viewpoint is essential.
What are the biggest worries on SFTR reporting?
Our view and what we are hearing from our customers is:
Obtaining and capturing all the necessary data points: There are approximately 150 data fields (75 required to match) under SFTR. The extensive dataset covers all securities finance transactions and data stored in disparate systems must be reported on a T+1 basis
Principal level reporting and the issues that ALD poses: Obligation falls on the principals to the transactions, ie, beneficial owners rather than their agents
Reporting matched data with paired UTIs: SFTR introduces the concept of a UTI and both sides of the transactions need to reference the same UTI
Amending existing booking practices: Execution timestamp is another new concept for securities finance transactions. Consideration is needed for transactions that are not traded on a platform or centrally cleared and for trade lifecycle events, for example, corporate action outturns
The long-term potential for fines and being ready on time
Are firms approaching different securities finance transaction types differently from a SFTR compliance perspective?
Firms are typically tackling SFTR from a legal entity perspective. If they trade a number of asset types, these are not being siloed. All firms are seeking a single low-cost solution across all securities finance transaction product lines.
Our clients will be able to use the extensive connectivity of IHS Markit and Pirum to other market infrastructures in compiling their reporting:
Connections to all four triparty agents will allow collateral managed by the agents to be received directly on behalf of reporting clients
Connections to clearinghouses, and various trading venues will mean we can capture any UTIs generated at point of trade and/or novation
Connections to the major trade repositories will allow clients to report directly to the repository of their choice
The Pirum solution covers all securities finance transaction types so firms know they will have a one-stop solution and do not have to worry. We do, however, understand that different securities finance transaction types are handled by different areas, and often different systems.
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