Based on what you know from the regulators, what is the optimal solution for SFTR?
It is important that firms follow a set of principles that will underpin the success of Securities Financing Transactions Regulation (SFTR). Key to this success, is how firms interact with governing bodies like the International Securities Lending Association (ISLA) and learn from the experiences of the trade repositories (TR). This is why we have been advocating the voice of the TR as we go through the design phase, and the Q&A session from the regulators will be an essential component also. With some operational investment ahead of implementation, being compliant with SFTR can be seamless for securities finance market participants.
Following the initial setup, the solution should operate by itself, seamlessly—not low touch, but no touch. This has been the underlying principle of the EquiLend/Trax solution: Leverage existing connectivity (Next Generation Trading (NGT), Post-Trade Suite (PTS) or Agency Lender Disclosure); population and matching of dual-sided trades for the most efficient reporting to TR; visibility and transparency in all aspects of the value chain; and flexibility to support different client requests.
If you had to narrow it down, what would you say are the top three most critical components of an SFTR solution?
First, transparency in the trade booking process. A robust unique transaction identifier (UTI) generation and execution timestamp process is essential. With the design of the UTI waterfall, the regulator is encouraging firms to book as many transactions as possible onto a centrally-traded platform. As the leading multilateral trading facility in the securities lending business, EquiLend is ideally placed to support this activity. The fact we can send those matched trades directly into our PTS platform to support all of the post-execution services, and then onward report via Trax to the TR, only adds further credence to our solution. Firms need to adhere to the waterfall as closely as possible; deviation of this that creates chaos to the matching process at the TRs will not be tolerated.
Second, standardisation of data. A clear understanding of the data is required, along with how it will be populated by both sides of the trade. Firms need to ensure that what is reported matches what is in their books and records. The regulator understands that not everything is going to be perfect and would rather see discrepancies than have massaged data providing falsely matched reconciliations. EquiLend and Trax have the ability to populate dual-sided data from point of trade, and with firms having built out at multiple points to receive data back from EquiLend, there is a completely automated feedback loop to ensure data reported from our system matches firms’ books and records.
The third most critical component: matched transactions at point of process. Emphasis needs to be placed to the processes that underpin the business, for example trade booking, trade amendments, mark to market, triparty required value and data population. It is essential that during these processes all the reportable components match. The EquiLend and Trax solution is the only offering that provides an automatic solution to all of these processes.
Should firms outside the European Union be concerned about SFTR?
They shouldn’t be concerned—there is still time to implement an SFTR solution—but they need to be prepared. While SFTR is a European regulation, due to the cross-border nature of the securities finance industry, most market participants around the globe will need to be SFTR compliant. We have had fruitful discussions with firms not just across the EU but in the US and Canada and even in the Asian and South African markets regarding SFTR compliance. If you have a securities finance business, SFTR should not just be on your radar now; you should be actively working toward compliance.
The securities finance industry is very manual. How do you expect firms to automate the SFTR process?
We have seen a major shift in recent years toward the adoption of automation within the securities finance industry. While manual trading and post-trade activities still happen—including emails and surprisingly, even faxes—there has been a great momentum within the industry to move as much of this activity onto systems such as EquiLend’s NGT and PTS. While there remains some manually traded and booked activity, particularly in the specials space, the volume of trades booked on-platform has absolutely skyrocketed in recent years, particularly with the advent of NGT. The average daily notional traded on EquiLend has increased by more than a third just since the launch of NGT in 2015. One of the benefits of NGT is that it can be used just as easily by a few people on a small desk trading on the intuitive screens as by highly technologically advanced firms that have built out full automation—and they can even trade with each other.
We are also witnessing a greater ambition from firms to automate all post-execution lifecycle events through PTS, into which we have invested considerably in the past few years in order to make the platform as easy and useful as possible for industry participants. Firms want a solution that achieves this aim but in the most cost-effective manner. Our pricing structure allows firms to achieve this, and as a result we are seeing a large increase in usage and continue to onboard new firms to PTS.
What impact will SFTR have on operational efficiency?
This is the biggest opportunity, but also ironically one of the biggest challenges firms will encounter. It can be difficult for firms to see the true benefits. To understand the maximum benefit they will achieve from SFTR, they need to be able to complete a full cost-per-trade analysis, incorporating not only the potential SFTR costs from all actors involved but also the supporting costs that come from automated post-trade services.
In terms of the functionality available, this is ultimately where firms can leverage the changes they are making in order to be SFTR compliant to their benefit. SFTR will absolutely require firms to be more operationally efficient and, ideally, implement as much straight-through processing (STP) as possible. In the past, some firms may have automated a portion of their processes but then manually inputted updates or modifications to a trade into their proprietary systems. That is not only inefficient but it adds unnecessary risk into the equation. We see a shift in that process happening throughout the industry, where the most efficient firms are leveraging both NGT and our PTS for their trading and post-trade processes. By moving these activities on platform, SFTR compliance becomes much simpler—especially when the firm also leverages the joint EquiLend and Trax SFTR solution. The result is SFTR compliance but also improved operational efficiency, cost savings and reduced risk.
Are firms ready for SFTR?
We see a wide range of preparedness amongst market participants, but on the whole the engagement has been excellent. It is important that we support the work conducted by ISLA and other governing bodies and continue our interaction with the regulator to ensure that we provide the necessary transparency to the project. To achieve this we have more than 20 firms in our SFTR working group, which has been an unprecedented collaborative effort amongst market participants toward the common goal of designing the optimal SFTR solution. We are working collaboratively with other firms in this space to demystify and prioritise the necessary requirements to ensure SFTR is a success with as minimal impact as possible to day-to-day activity.
What is EquiLend doing differently to prepare for SFTR?
In order to be more focused on our clients’ needs gearing up to SFTR, we have restructured and reprioritised projects that focus on making the market more efficient for our clients. That includes incorporating clearing services throughout our products, more closely integrating our suite of services and also strengthening our partnerships with other service providers, particularly our SFTR partner Trax. As a result, we expect our clients will experience a more complete service offering—a one-stop shop for trading, post-trade, clearing, market data, performance reporting and compliance.
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