What should firms be doing right now to prepare for the implementation of SFTR?
The Securities Financing Transactions Regulation (SFTR) will challenge many different types of firms in a multitude of ways. One of the first things that firms should get to grips with is the scope of SFTR across regions, entities and products. Trax were recently at the Securities Finance Masterclass in South Africa, discussing the impacts of European regulation at a global level. Depending on the branch structure and activity carried out, some firms will at best only have to share core data with their European counterparts, however, at worst some firms will be captured by the full reporting obligations. In reality, this scoping exercise should already have been carried out and reporting firms should now be at a stage where they are assessing the data requirements and working with their vendors to understand service offerings. Furthermore, firms captured by SFTR should also ensure that they are involved in the industry discussions led by the International Securities Lending Association (ISLA), International Capital Market Association (ICMA) and the Association for Financial Markets in Europe (AFME).
What challenges are firms finding while preparing for SFTR compliance?
Budgeting, resources and high demand for expertise. Given the uncertainty around timing, since the European Securities and Markets Authority (ESMA) draft standards must be first endorsed by the European Commission, firms are struggling to make accurate estimates on how the budgeting cycles will look and where and when they need to scale up for implementation. We believe that building everything in house and not using a vendor solution or at least a module of a vendor solution may prove extremely challenging or even prevent some firms from being SFTR compliant in time.
Secondly, even where firms are already working on SFTR, the movement of resources from the second Markets in Financial Instruments Directive (MiFID II) to SFTR has not been as smooth as first hoped. This was initially due to the fact that MiFID II required significant focus well into Q2 2018 with reference data reporting under Regulatory Technical Standards (RTS) 23 and Best Execution Reporting under RTS 28 being particularly challenging. Uncertainties around the SFTR go-live date mean that even when firms are wrapping up or scaling down their project teams for MiFID II, the difficulties in planning and budgeting for a regulation that has no live date yet means that these resources cannot simply be moved onto SFTR. In some cases, firms will have to hire the same people or consultants with similar skills at a later stage, which takes us to the next challenge.
As with all new regulations, there is a high demand for product and regulatory knowledge. It will take time for the securities finance experts to understand the full impact of regulation and similarly for the regulatory reporting experts to understand the many complexities of the securities finance world.
To put it in a few words, the expertise crucially needed to support the initial phase of review could be strained.
Trax, the post-trade arm of MarketAxess, combines securities finance expertise in both repo and securities lending with comprehensive experience in trade and transaction reporting. It has indeed proved invaluable to our client base as we were able to initiate discussions on SFTR in the build up to MiFID II. The ability to offer continuing access to our teams and experts throughout the various regulatory lifecycles is at the heart of our value proposition.
What challenges are firms finding while preparing for SFTR compliance?
SFTR has the potential to drive automation into an area of the market that has typically been manual in its nature and continues to support off-venue over-the-counter (OTC) trading. Many conference panels will discuss the virtues of blockchain and distributed ledger technology and how they can be applied to the securities finance markets. This really is a case of trying to run before you can walk, particularly in the case of the bilateral repo market. The perceived benefits of SFTR are dependent on the position your firm holds in the market; it is generally accepted that at the very basic level, automation of confirmations and lifecycle events should already be in place. At Trax, we provide bilateral repo post-trade matching services to our clients. We believe that the majority of the bilateral repo market confirmation process is either managed manually or relies on settlement matching. With the size and importance of the market any regulation that encourages automation should be looked on as a huge positive.
As a result of SFTR, we do expect to see a move towards greater on-venue trading, which again should increase transparency and foster competition. The expectations from ESMA are very high as SFTR will help better understand some of the risks associated with securities finance, especially around the collateral usage. We have been encouraged by the changes in trading behaviours following the implementation of MiFID II and we will continue to support regulatory changes and provide our clients with the most appropriate solutions to meet their needs.
What would you recommend firms do to ensure a smooth implementation?
Aside from getting management buy-in and securing the budget the obvious answer would be to start early. However, if you are reading this and think that starting now is early, this is not the case. Do not leave this implementation down to either your securities finance or regulatory reporting teams. SFTR crosses organisations, and a successful implementation will be predicated on cooperation between the securities finance and regulatory reporting teams amongst others. A successful implementation should include automation of trading, affirmation, confirmation, matching and reporting. Through leveraging SFTR, reporting firms can maximise the chance of a smooth implementation by using the leading industry vendors in the securities finance space.
What will market participants be expected to report from day one?
The reporting obligation for SFTR has a staggered approach with reporting requirements being phased in according to the type of firm. Investment firms and credit institutions will be caught in phase one or day one of go-live; central counterparty clearing houses (CCPs) and central securities depositories are caught in phase two, which is three months after go-live; insurance firms, UCITS, alternative investment funds and pension funds fall in phase three, six months after go-live; and non-financial counterparties being caught in phase four, nine months after go-live.
Having said that, whenever your day one is, the regulator will expect you to deliver accurate data within a T+1 reporting deadline and keep that information up to date for as long as that trade is live. This means reporting lifecycle events, loan value and collateral updates and reporting any errors that you have made to the trade repository.
What are MarketAxess and Trax currently working on? And what plans does the firm have over the next 12 months?
We have been working with leading industry providers in the securities finance space for well over a year. Trax, in preparation for SFTR, has been collaborating with Equilend to ensure we have a comprehensive solution covering all SFTR eligible assets. The combination of Trax’s expertise in transaction reporting and repo matching, and Equilend’s expertise in the securities lending space means that we are able to provide firms with the ability to trade, match and report through one solution. Having just completed a successful MiFID II implementation, Trax has now begun the process of building its SFTR solution and we are also enhancing our repo matching platform to bring further automation to our existing dealers and buy-side firms currently benefiting from our services.
We do see SFTR as an opportunity and the regulation will definitely help us in shaping our product offering. The Trax roadmap for 2018 and 2019 is pretty full already and we are looking forward to many new developments and potential growth opportunities in the post-trade, data and reporting space.
MarketAxess will also continue to enhance its all to all open trading solution globally and build on innovative trading protocols to help our clients across the buy and the sell side find alternative pools of liquidity in order to trade more efficiently and reduce their costs of trading to the benefit of the end investors. Ultimately reaching a superior outcome for the end client is the aim of better regulation and one we should all support and thrive to achieve.
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