What trends are you currently seeing in the trade repository space?
Trade repositories (TRs) are becoming an increasingly important tool for monitoring trading activity in key markets. Regulators have recognised TRs as essential elements of regulatory compliance because of their ability to consume, validate and store vast amounts of transaction data that regulators seek to monitor and analyse for trends in trading activity and risk.
They proved themselves as effective trade reporting solutions for over-the-counter (OTC) and exchange-traded derivatives contracts, so TRs are now being harnessed to implement Securities Financing Transactions Regulation (SFTR), the new regulatory mandate in Europe and the UK for securities financing transactions (SFT). For example, DTCC created the Global Trade Repository (GTR) in 2012 to help firms meet their derivatives trade-reporting requirements. Today, we’re adding functionality so that GTR will also help users comply with SFTR.
Beyond extending TRs’ role into a new market, the other notable trend is TRs with the capacity not just to collect and store massive volumes of data but also to enhance the quality of that data and analyse it. TRs that offer this added value can enable users to sharpen their market intelligence and reduce trading risks. Through its new portal GTR offers custom search capabilities along with detailed statistics on things like industry and client overall matching rates, the top five reasons for rejected submissions and historical statistics.
How has the TR landscape become more competitive?
More TRs have come to market over the past few years, both in existing jurisdictions as well as in a growing number of new jurisdictions as regulatory mandates for OTC derivatives expand across the globe. We expect the same geographic expansion will occur with SFTR. SFT reporting is a G20/Financial Stability Board requirement in which EU and UK regulators are first movers with SFTR but regulators in the US and other jurisdictions will most likely adopt similar rules for securities financing transactions in the coming years.
The result is that users now have more choices for their trade reporting. And, while TRs are highly regulated, that doesn’t mean all TRs offer the same capabilities or level of experience.
Firms looking to choose a TR to support their trade reporting compliance for derivatives and securities financing should vet their options carefully to identify those that can best address today’s evolving regulatory demands.
For instance, look at a particular TR’s track record—does it have solid relationships with clients and regulators along with proven data security? Looking forward, can the TR handle compliance beyond Europe if SFT regulation is enacted in additional jurisdictions? And, not least, can the TR support the various potential Brexit scenarios post-March 2019?
DTCC’s GTR is arguably the largest and most experienced TR in the market today both in terms of global and the European Market Infrastructure Regulation (EMIR) reporting. In terms of experience, we are simply the most experienced player in the global derivatives processing space. In 2006, DTCC established the Trade Information Warehouse (TIW), a centralised credit derivatives utility, which services 98 percent of cleared and bilateral credit derivatives, valued at $10 trillion.
TIW set the precedent for collecting trade data in a single place and served as a blueprint for the future of global trade reporting.
In terms of size, our European repository is the largest for EMIR reporting, processing more than 500 million messages a month. We have 6,000 clients worldwide, 3,500 of them in Europe. We have long-standing relationships with regulators and operate in seven jurisdictions around the world, from Europe to North America to the Asia Pacific region.
What are the main challenges of SFTR? And how does it differ from EMIR and MiFID II?
Coping with high reporting volumes and a large number of data fields will be some of the biggest challenges. Due to the complexities of securities financing, many firms use manual processes in their trading and post-trade activities. As a result, complying with SFTR will create extreme pressure to automate these processes. For example, SFTR mandates 155 data fields, compared to 129 required under EMIR for OTC derivatives. As a result, firms should seek out TRs that can help them automate, and therefore better integrate their processes with those of the repository.
DTCC’s GTR offers a number of features that promote automation and simplify integration with firms’ internal processes, such as user-friendly dashboards, ad hoc reporting options and data extraction for exception management. In the future, we plan to add scheduling functionality to create and manage bespoke recurrent reports. GTR also incorporates management information systems that record and track accepted and rejected trade details, and analyse the status pairing and matching of reported trades.
Additionally, firms shouldn’t minimise the complexity of the regulatory reporting function they must fulfil under SFTR. SFTR rules are notably more detailed than EMIR and MiFID II for derivatives, in part because they address the very diverse universe of SFT products: repo and reverse repo, securities and commodities lending and borrowing, sell/buy-back, buy/sell-back, margin lending and borrowing. And as we know from experience, these rules will likely be revised and updated over time. Other challenges of this regulation involve pairing and matching and effects on a firm’s booking model, agreeing on the unique trade identifier (UTI) and the reuse of collateral.
How is DTCC working with clients on SFTR?
GTR was built through collaboration with our users and that continues to be our approach as we adapt our infrastructure to accommodate this new trade reporting mandate. As a user-owned and governed TR, which sets us apart from the competition, GTR works with users to develop reporting solutions that integrate with their workflows to ensure compliance with reporting requirements.
In the case of SFTR, we started user outreach early this year and will continue to host SFTR industry user group forums to help highlight industry issues and facilitate dialogue amongst market participants. We have been engaged with both the International Capital Market Association (ICMA) and the International Securities Lending Association (ISLA) for over two years in preparation for SFTR, as well as prominent industry players, like IHS Markit and Pirum, Equilend and Trax, for a similar period. Engaging through trade associations and within the existing infrastructure helps us work with the market to solve big challenges. For example, how best to exchange UTIs, leveraging the benefit of our experience of operating under the European Securities and Markets Authority (ESMA)’s first systemic risk monitoring regime, EMIR, as the largest trade repository. Between now and mid-2019 we’ll be reaching out to users to explain updates to GTR functionality resulting from SFTR. We’re making it easy for existing users to extend their service to SFTR by requiring them only to sign an appendix to the operating procedures under their existing contract. Those clients can continue to use existing connectivity with GTR, or connect to us via a number of partner firms.
GTR will conduct a full six months of end-to-end user acceptance testing (UAT) with clients, starting in mid-2019, and will go live as early as possible so that testing in production can start. As we have with other recent large initiatives, we are looking to provide a testing simulator to give firms the ability to begin identifying gaps in their data in advance of UAT. That should be available in the next couple of months.
This launch schedule ought to convince firms to begin their own internal preparations ASAP.
If firms haven’t started implementation, what advice would you give to them?
Don’t wait another day. Q1 2020 is the target for the first phase of compliance and will impact investment firms and credit institutions. That date may seem like a long way away, but as we all know, it will be here quicker than we realise and as there is so much to do, you should start now.
Securities finance transactions have never been subject to the depth and breadth of data collection and reporting SFTR will demand, so firms in this market will need to enhance and test their processes for data gathering and, in many cases, retool their workflows that currently sit at the core of the securities finance markets.
There has been a lot of talk about collaboration in recent months. In what ways are you seeing firms collaborate for SFTR?
Besides our collaboration with clients, we have strong relationships with leading vendors. GTR already has 150 vendors connected via an established partner programme for derivatives reporting. We are forging additional strategic relationships in the securities financing space to support our mutual clients’ SFTR requirements. As of now, these announced partnerships include Equilend and Trax, IHS Markit and Pirum, amongst many other software providers, data aggregators and trading platforms.
Given the ISO 20022 reporting requirements, it’s anticipated there will be extra dependencies on technology solutions to facilitate reporting to a TR. Vendors specialising in SFTR are key to the implementation effort for gathering the new data sets and testing against GTR’s standards. Our partner programme not only gives users more options for connecting to GTR, it offers us additional opportunities to expand GTR’s straight-through processing, reconciliation and data management capabilities and provide seamless links to mutual clients’ existing infrastructure.
Alongside cost-effective vendor connectivity, we regularly share insights with our partners and contribute to each other’s SFTR working groups. Collaboration within an increasingly connected ecosystem is vital in delivering an SFTR solution that adds real value to the end user.
How are TRs preparing for SFTR?
All TRs that plan to seek authorisation to provide SFTR reporting need to become intimately familiar with the detailed requirements of the regulation. One challenge here is the fact that the regulatory details, namely a number of technical standards, are not nailed down yet and are still awaiting approval by the European Commission. So, ongoing vigilance in monitoring the reporting requirements is important.
Overall, though, it’s clear that, structurally, SFTR is quite similar to EMIR for derivatives. For instance, parties must report details of the conclusion, modification and termination of any SFT to a TR by no later than T+1. The regulation includes a dual-sided reporting obligation. Open positions need to be backloaded to a TR. Reports need to be paired and matched, with very tight tolerance levels.
This similarity between the regulations means that TRs’ existing functionality can be adapted fairly easily to cover SFTR. For GTR, this fact is allowing us to focus our preparation efforts on the user community. Besides our extensive UAT programme, we offer a GTR training certification to users and are giving them early access to our testing simulator.
Our industry forums will continue to address questions and challenges around SFTR compliance, and our global client support team is always available to answer users’ questions.
I should also note that, while it wasn’t specifically designed to accommodate SFTR, the global portal we built for GTR last year will yield positive benefits for SFTR users. The portal is self-service and enhances the user experience by consolidating functionality at a single entry point. The portal gives users direct, electronic access to the data stored in GTR, which means they can control the content, number and frequency of reports we produce.
How will DTCC’s GTR help users once the regulation moves beyond Europe?
We expect jurisdictions beyond Europe to enact reporting requirements for securities financing transactions over the next few years. Firms with global trading activity should keep this point in mind in choosing their TR for SFTR reporting.
A repository like GTR with global experience and operations has already weathered numerous regulatory changes and has established long-standing relationships with dozens of regulators. GTR has a proven capability to adapt its functionality to accommodate the unique requirements of different jurisdictions and also to help users build flexible compliance frameworks suitable for multiple sets of rules.
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