Firms are encouraged to be well prepared for SFTR, but with adjustments still being made, do you think some firms will take more of a wait and see approach?
After an initial flurry of activity, some firms did take a pause as the Securities Financing Transaction Reporting (SFTR) implementation date drifted, however, I would be surprised and concerned if any firm is still adopting a wait and see approach. The core of the regulation’s requirements are unlikely to change at this stage and there is considerable preparation required in a relatively short timeframe if firms wish to be able to test their functionality ahead of the first implementation date. An example would be ensuring that you have all the necessary data elements (over 100) that are required by SFTR. Any final adjustments and best practices are not going to alter the bulk of the work required to be ready. There is much work that firms should be doing now in preparation for having their solutions in place. There is little time to wait and see. For example, at Northern Trust we are already beyond the planning stage and are well into the required development for SFTR, to be able to service our clients on implementation in 2020.
Arguably, SFTR is one of the most complex regulations yet, however, some industry participants have argued that it will improve market practices. Do you agree with this?
Yes. A good thing about SFTR regulation is that it forces industry participants to start standardising the data structure of securities finance. The industry has worked successfully until now with both borrower and lending agents able to manage the lifecycle of a trade differently in their respective systems. SFTR will provide an opportunity to bring the industry closer to a single model. Standardisation of the industry should make it more efficient. For example, there will be less exceptions and delays in trade processing thus making it easier to trade. Standardisation should also simplify startup for new entrants, particularly technology firms, offering them easier access into the industry. Ultimately, a more efficient market will benefit all participants.
What do you think the securities lending landscape will look like in the next five years? How will regulation impact it?
If history is any indication of the future, regulation will continue to be at the top of everyone’s agenda for the next several years. Recent developments on SFTR and resolution stay protocols have provided certainty around details and implementation timeframes. As these regulations are finalised and implemented, they will allow the industry to position itself for the future.
In addition to regulation, alternative distribution channels, alternative trade structures and technology will continue to be a focus for the securities lending industry. Central counterparties continue to gain traction and are working closely with the industry to help provide efficiencies both from a trade matching and balance sheet perspective. Along similar lines, borrowers are looking for different trade structures to meet their specific requirements. These include different collateral and term structures. It will be important for beneficial owners to be flexible in terms of the types of collateral they accept and trade structures they will allow in order to keep pace with the changing securities lending marketplace. As the industry grows and expands to support new distribution channels, regulations will need to be flexible to support these changes.
What regulations are currently impacting the US?
The most direct regulatory impacts for lenders in the US securities lending market in 2019 and 2020 are the resolution stay period regimes becoming effective in significant jurisdictions globally and SFTR. Other regulations impacting the US lending market more broadly are and will continue to be those that affect borrower demand, such as liquidity coverage ratio and net stable funding ratio.
Finally, changes to the calculation for risk-weighted assets have been approved by the Basel committee. Reducing the regulatory costs on securities lending transactions can provide a catalyst for an increase in activity. Northern Trust is working closely with the industry, and with our clients, to ensure that the regulations are adhered to and understood by our clients.
How important is transparency and data provision when it comes to reporting implications?
SFTR is bringing information and transparency to the forefront of the industry. There has been a trend towards more transparency and clients are demanding more information on their programmes. Transparency will continue to be a focus for clients and moving to the broad data requirements of SFTR should ultimately provide more optionality for clients. The challenge going forward will be to understand what the client’s need for data and ensuring that is available to them.
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