How will SFTR affect the securities lending industry? What changes can we expect?
The Securities Financing Transactions Regulation (SFTR) will have significant implications for the industry. First of all, the regulation requires that any transaction where securities are used to borrow cash, or vice versa, must be reported to a European Securities and Markets Authority (ESMA)-authorised trade repository. The new reporting requirement applies to a wide range of securities transactions, including repos, sell-buy back and buy-sell back activities; securities and commodities lending and borrowing, as well as margin lending and borrowing.
While SFTR is a European regulation, its impact will be felt beyond Europe’s borders.
The SFTR requirements will apply to both financial and non-financial entities which are established in the EU, including all branches irrespective of location, as well as all entities that are established in a third country if they conclude a securities transaction within one of their EU branches.
How will the new regulation affect current processes in securities lending? Do you think there needs to be an increase in automated processes?
Our recent research has shown that transaction reporting for securities financing trades may create five times as many reports as trades when SFTR takes effect, which is likely to significantly impact trade booking models. The regulation may also affect 60 percent of current processes resulting in the need to develop new processing capabilities.
It is evident that firms will need to reassess their current workflows so that they can understand the data they process, ascertain how that data will be obtained and—for that data which is not available—determine how it can be sourced. Also required, is a validation of messages when accepting and storing them to ensure message completeness, as well as the accuracy of data formats, including reference data validation, legal entity identifiers, international securities identification numbers and International Organization for Standardisation country codes.
With this in mind, firms will need robust control frameworks in place to manage the data effectively in case of any possible breaks and to oversee the accuracy of data reported by a third-party on a firm’s behalf. This should lead to processes that ensure the reporting of securities lending trades in an accurate and timely manner, as this is critical to the success of SFTR implementation.
In what ways will it change current reporting once the regulation takes effect?
SFTR shares many similarities with the European Market Infrastructure Regulation (EMIR) from a trade reporting perspective, however, there are also significant differences. Looking specifically at the differences, the securities finance industry has much more work to do in comparison to the derivatives industry when it first faced trade reporting regulation, especially regarding data availability and the workflows that currently sit at the core of the securities finance industry. Repo and stock lending businesses are traditionally more siloed than those of derivatives; therefore it will likely take longer to implement processes to comply with SFTR reporting than it took for EMIR.
What other challenges will the securities lending industry face?
A key challenge for the securities lending industry will be around the development of a unique transaction identifier (UTI) creation and sharing process for transactions. The UTI is one of four key fields used to pair trades within the Trade Repository reconciliation (alongside reporting counterparty, other counterparty and master agreement type—where applicable). The issue of developing a process to create and share UTIs is currently being worked upon by the trade associations, however, requires focus from the entire industry to agree and then implement.
And how will the regulation benefit the securities lending industry? What opportunities will it bring?
SFTR is the latest piece in the regulatory efforts to tackle systemic risk issues exposed by the global financial crisis. If SFTR preparations and compliance are approached correctly, SFTR will deliver some clear benefits such as data transparency which, in turn, will result in more accurate pricing, as well as contributing to the creation of greater transparency in the global financial system overall and the mitigation of systemic risk.
If you could give one piece of advice to the industry on preparation for SFTR, what would it be?
SFTR will be adopted via a phased-in approach, likely beginning in early 2020. Given the complexity of the SFTR reporting requirements and the volume of data that will need to be reported, it is vital that firms act now to ensure readiness for the implementation.
What is more, given the interconnectedness of financial markets and the fact that a large amount of securities financing activity takes place across borders, it is essential that the regulation is seen as a multi-jurisdictional initiative aimed at reducing systemic risk on a global scale.
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