The beginning of 2020 has moved very quickly, where are we now with regards to the implementation of SFTR?
Like many new regulations, there is a significant element of too-little-too-late with regards to testing, controls and the quality of implementation of the reporting. Many organisations have been thrown by the Settlement Finality Reporting Requirements from the final guidelines published on 6 January. There remain a number of uncertainties which have not been resolved by the publication of the guidelines.
How would you describe the overall markets preparedness?
Banks’ readiness for the Securities Financing Transactions Regulation (SFTR) reporting varies significantly. No bank is fully prepared to report on a complete, accurate and timely basis at this stage.
A worrying number of smaller institutions are only now coming to terms with their reporting obligation. A subset of these have still not recognised that they have an obligation. The very smallest organisations of all are unsure of which way to turn, finding a lack of delegation options and questioning the merits of having to make such a large investment to support the reporting of very low volumes.
What are the key concerns your clients have and how easily are these addressed?
System deficiencies are a major concern. In general, firms know what they are required to report but continue to have to work with legacy systems that make this extremely difficult. Making the distinction between modifications and corrections is one of the more universal problems. Likewise, many firms routinely cancel and book new transactions in relation to a variety of lifecycle events such as collateral substitutions, re-pricing, loan reallocations, re-rating and fee updates rather than providing modifications and collateral updates in keeping with the SFT contracts that have been legally agreed.
Firms also respect precise rules and guidelines for reporting and some aspects of the final guidelines are not. For example, how to categorise and report commodities securities financing transactions and how to report trades that face the European System of Central Banks under the Markets in Financial Instruments Regulation’s transaction reporting rules. There is also reluctance to adopt an approach in areas such as bilateral margining (a fundamental part of the repo business) where no worked examples or clear guidelines currently exist.
Many of these challenges will be addressed through industry best practices, the European Securities and Markets Authority’s (ESMA) Q&As, system enhancements and the ultimate replacement of aged legacy securities financing transactions systems. In the meantime, there needs to be an understanding that this remains a work in progress (projects cannot down tools entirely on go-live date), firms will continue to prepare enhancements in systems and processes and ensure they maintain documentation around their future enhancements.
SFTR is designed to enhance the transparency of the securities financing markets, how will it achieve this and to what benefit?
SFTR will help Europe meet its obligations under the G20 Financial Stability Board (FSB) mandate. It is also likely to allay many fears surrounding collateral reuse, the size, nature and limited risks around shadow banking and perhaps around any firm or individual’s ability (or motivation) for attempting to manipulate securities financing transactions markets. The high-level published details about the size, scale and nature of securities financing transactions markets are perhaps likely to be of limited interest outside academia.
Hopefully, with a level of comfort around the risk limiting aspects of operating in the securities financing transactions market, coupled with an understanding that collateral reuse and shadow banking are not toxic, will limit the regulators’ appetite for introducing more punitive regulation in future.
With any SFT trades happening after Saturday 11 April, 2020 due to be reported on, how smoothly do you envisage this going?
Easter is cancelled! We envisage a quiet first day with limited reporting required for SFTs concluded between Saturday 11 April and Monday 13 April. Nevertheless, go-live is likely to be somewhat traumatic with banks’ internal systems struggling and reports failing trade repository validation rules. Trade repositories may also face challenges in ingesting production volumes for the first time.
Keeping calm and carrying on will need to be the order of the day. An element of patience and persistence will be required to get initial reports across the line and to understand how to generate, share and ingest unique trade identifiers (UTIs). Operations staff will also need to quickly come up to speed with how to receive and interpret the trade repository feedback with regard to accepted, rejected and alleged transactions and how to handle reconciliation breaks most efficiently and effectively.
When do you think we will see the first fines?
Fines seem unlikely until several years into the SFTR reporting obligations going live. In practice, there are likely to be a number of low-hanging fruit for national competent authorities wishing to bring enforcement actions with systemically significant counterparties either partially or completely failing to report whole businesses post go-live. In these circumstances, the honesty and diligence with which these organisations deal with deficiencies in their reporting will be key to whether any punitive action is taken.
Will there be any delays to the second, third and fourth rounds of implementation?
SFTR reporting has already been subject to significant delays, with the original expectation when the regulation was published back in 2015 that this would go-live for banks and credit institutions before the end of 2018.
For the second round of implementation, many market infrastructures are planning to go-live with the banks ahead of schedule in April 2020. The buy-side will put broker-dealers under growing pressure to offer fully delegated reporting solutions for October but seem highly unlikely to be successful in achieving any postponement. As for the non-financials, it seems likely that they will press for equal treatment (fully delegated reporting), regardless of their size (where it is already mandatory for small and medium sized non-financial counterparties).
One area where you could potentially see some concessions are for the commodities financing industry. There are a great many more unknowns in this space and demands from ESMA for a level of flexibility in interpretation that market participants are extremely reluctant to give. There has been a great deal of lobbying from this industry ever since the consultation on the guidelines was published early last summer and they may, possibly enjoy some success.
Do you feel there will be issues around the providing of UTIs on time and what is the best course of action for any delays with these?
I think there is a lot of scope for misinterpretation of who is responsible for generating UTIs and a lack of market utility-based infrastructure (at low cost) for sharing them. Therefore, there will be many duplicate reports, where both parties have reported with different UTIs. There will be many delayed reports, where UTI recipient counterparties are left waiting for the UTIs until after the T+1 deadline has passed. There will also be reports made destined for rejection where compliance departments have insisted on reports being submitted by close of business T+1, regardless of whether the mandatory UTIs have yet been populated.
Have you any tips for the smooth implementation and running of a business reporting and moving forwards with this regulation?
Maintaining known issues logs and resolution plans, procedures around all reporting processes and building effective controls for completeness, accuracy and timeliness will be key to a successful delivery. There is an element of reporting being a numbers game; ensuring that your most prolific activities are completely and accurately captured before devoting too much time to edge cases. While the utopia of perfect reporting on day one may not be attainable, resources will need to be retained to ensure a positive evolution in the quality of SFTR reporting going forward.
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