You recently joined Kaizen Reporting. What does your new role entail?
I joined Kaizen to lead development and implementation of our suite of quality assurance and regulatory testing products for the Securities Finance Transaction Regulation (SFTR). Pre- and post-SFTR Article 4 reporting go-live, we will offer accuracy testing, advanced reconciliation, reference data testing and a tailor-made full governance framework of controls across all financial services reporting parties and their delegates.
Kaizen is a highly specialised firm with an unrivalled focus solely on quality assurance and regulatory testing in the key G20 financial services reporting regimes SFTR, the second of Markets in Financial Instruments Directive (MiFID II) and European Market Infrastructure Regulation (EMIR).
What’s your background?
I spent nine years at Barclay Capital as an interest rate strategist before joining J.P. Morgan in 2007 to implement MiFID reporting for fixed income. I ran Europe, the Middle East and Africa fixed income regulatory reporting team through the financial crisis working closely with the Bank of England (subsequently PRA) in establishing the liquidity reporting regime for fixed income in 2009.
As chair of what became the International Capital Market Association, European Repo and Collateral Council (ERCC) and SFTR Taskforce, I advised on the Financial Stability Board working group, culminating in their publication Standards and Processes for Global Securities Financing Data Collection and Aggregation in 2015.
Also during 2015 and 2016, I advised the European Central Bank on their SFT Datastore project. More recently, I was closely involved with European Securities and Markets Authority (ESMA) consultations on the RTS for SFTR as well as in implementing MiFID II for the bond market businesses.
What are the latest developments when it comes to SFTR?
The European Commission has now stated they plan to endorse, with amendments, the draft regulatory technical standards (RTS) and implementing technical standards (ITS). These amendments and the six weeks for ESMA to respond will introduce some additional delay to SFTR Article 4 reporting go-live. However, I anticipate that the RTS will be published in the Official Journal of the European Union at the end of 2018 or early 2019 and that reporting will go-live for banks and investment firms in Q1 2020 with market infrastructures, fund managers and non-financial counterparties to follow at three-month subsequent intervals.
Are the commission’s amendments significant?
The changes are minor but extensive. There are a large number of changes in semantics, providing further clarity through simpler language.
The material changes relate to concerns that legal entity identifiers for branches and standards around unique transaction identifiers may not be ready in time for go-live.
They have also incorporated industry feedback on two reportable fields—the first, that agent lenders should be permitted to use repo trades and the second, the termination optionality needs a non-applicable tag for repo and securities lending trades.
SFTR is going to be even more complex than MiFID or EMIR. What are the key highlights?
Participants in European securities financing markets will be required to provide daily reporting to a trade repository of not only every new trade, amendment, correction, error and cancellation but also the majority of lifecycle events, collateral valuations and legal entity-wide collateral re-use statistics.
It’s a herculean reporting task that will hand a legal obligation to all but the smallest non-financial counterparties to report between 61 to 128 fields (product dependent) across four reporting tables.
Reporting parties will be tasked with ensuring that between 36 to 48 of these fields can be matched between reporting parties (intra and inter-trade repository) for ESMA to be able to interpret the data and the European System of Central Banks Datastore to be able to create the Europe-wide data aggregations.
Handling trade repository reconciliation queries on SFTR is set to become a significant and complex operational task post-go-live.
Why are regulators now turning their focus to securities?
Securities financing markets are very large in scale and seen as a contributor to the financial crisis of 2007 to 2011.
Concerns were raised over shadow banking, the lack of transparency in securities financing transactions, the potential for a build-up of leverage, interconnectedness and the pro-cyclical nature of SFT markets.
G20 regulatory authorities working through the FSB, concluded in 2015 that there needed to be regional SFT reporting, with global aggregation of these reports to identify any systemically significant issues.
What advice would you give to firms for preparing for SFTR reporting?
Start now if you have not done so already. This is a complex regime and securities financing markets have not been subject to reporting requirements until now.
There is less precedent, less market convention and less infrastructure in place than for other markets. In terms of next steps, we would recommend the following:
• Secure appropriate project governance and planning—even if you plan to delegate your reporting Assign business analysts to identify internal data sources (and where you need to go external), data gaps and timing issues
• Ensure open dialogue and engagement with the business and traders. SFTR will have a material impact on how firms do business
• If you are planning to complete or partial reporting solutions in-house, you need to provide technology teams with clear and comprehensive business requirements and functional specifications
•Build controls and management information requirements into the project plan. Adequate reconciliation and quality assurance should not be a ‘day two’ delivery
Why is data quality such a big issue when it comes to reporting?
Regulators are turning their focus to the quality of regulatory reporting data. We have seen that with EMIR and now MiFID II. SFTR will be no different.
Effective identification, monitoring and surveillance of the activities of SFT markets and the build-up of counterparty and collateral risk are entirely dependent on high-quality reporting.
If the data is full of inaccuracies and inconsistencies, then it is likely to be challenging to process and interpret and ultimately misleading.
From a firm’s perspective, ensuring accurate and complete reporting from the get-go will mean less risk of regulatory censure, reputational risk or costly back-reporting.
What is the ‘valid but wrong’ problem?
This is something that we at Kaizen address. Just because regulatory reports have been validated by an approved reporting mechanism or trade repository, doesn’t mean that the data in the reports is correct.
Our quality assurance service ReportShield checks the data inside the reports for accuracy and completeness. It will do the same for SFTR—it will test the quality of a firm’s implementation of SFTR, ensure that the reporting firm is on a path to continual improvement in data quality, that the controls and testing environment become embedded in business as usual, and that senior managers are kept abreast of the ongoing level of regulatory compliance.
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