How do you feel the industry has performed in getting ready for SFTR?
Even though the Securities Financing Transactions Regulation (SFTR) has been on the roadmap since about four years ago, most sell side clients will only be ready just in time before the new reporting start date on 13 July.
This has multiple reasons:
• The continuous postponement of the SFTR implementing regulation, which was finally published on 22 of March 2019 by the EU lead to budget issues for some market participants during the past three years. Many market participants have started and stopped their projects multiple times in recent years, as they lacked the certainty around when the reporting requirement will finally kick-in.
• Although it was clear after the publication of the implementing regulation that the reporting start date for the credit institutions and investment firms will be 13 April, market participants were lacking the final ISO 20022 XML schemas, which were published on 20 December 2019, while the final guidelines were only published by the European Securities and Markets Authority on 6 January.
• Many sell-side firms only really started their SFTR projects at the end of 2019 or at the beginning of 2020 once these level three guidelines were available, and therefore potentially underestimated the complexity of SFTR.
• Also, the broad definition of a securities financing transaction lead to some uncertainties regarding which transactions are considered as SFTs and which ones are not. Some entities were still struggling to identify whether the transactions they execute are subject to SFTR reporting and which are not.
• The late availability of the ISO schemas and the final guidelines lead to quite late availability of the trade repositories’ user acceptance testing and pre-production environments.
• The introduced ISO 20022 standard has its complexity as a lot of firms have limited or no experience with this standard and multiple actions and reporting types, which are only applicable to specific transaction types depending on how these transactions are executed, make the reporting regime quite complex.
• Especially the collateral reporting requires a lot more information than any other reporting regime. This element of reporting has its own complexity considering data requirement and linking between reportable transactions and the associated collateral. The fact that many firms considered SFTR reporting requirement as an “EMIR-like reporting regime” might have misled them to think that SFTR is “just another EMIR”.
• Due to the current market conditions, some credit institutions and investment firms have only very limited activity in SFTs, so that SFTR did not have the highest priority and they only recently figured out that they have a reporting obligation. These firms do certainly benefit from firms like ours, which can help them to generate SFTR reports with very limited efforts as we do not require the reporting in ISO 20022 XML format, but we can even accept Excel or CSV reports or they can input the data manually directly on our platform.
• A lot of regulatory consultations and changes are currently ongoing simultaneously. SFTR going live in July, Q&As as well as new technical standards and consultations were published for EMIR, MiFID II/MiFIR, Securitisation Regulation, CSDR, etc. Compliance and regulatory experts are getting overwhelmed by the shire mass of regulatory updates.
• Last but not least, the COVID-19 pandemic which has highly impacted the market volatility and the availability of resources. Some entities had to change the entire IT structure and their operating model to comply with the new situation in which interpersonal contact should be reduced as much as possible.
All the above-mentioned reasons lead to the situation that many market participants will get in trouble to complete their end-to-end testing before the go-live of SFTR by mid of July. However, our customer base is on track to finish their testing activities before the go-live.
What lessons could be learnt for future regulations or phases of SFTR implementation?
We believe that publishing the reporting schemas as well as the final guidelines less than six months before the initial go-live date of such a complex regulation like SFTR was simply to short for the market participants to get all done in an organised way before the reporting start date.
Obviously, the lockdown due to the COVID-19 had a dramatic influence on market participants and was absolutely unpredictable for everyone.
However, we encourage market participants being part of the October and January waves to make their decision on how they intend to comply with SFTR as soon as possible if not already done.
We experience that some buy-side firms are still in the evaluation phase, which is a bit concerning considering that the reporting start date for these entities is less than 80 days away. SFTR is a complex regulation and even highly-skilled and staffed market participants were struggling to get everything done in time.
For future regulations, we encourage the regulators to grant more time to the market participants after having published the schemas and guidelines, as most of them are simply overwhelmed by the flood of new regulations and regulatory changes they have to deal with.
How many market participants are outsourcing reporting? What would be the reason behind this?
We still see a strong appetite from buy-side firms to outsource the SFTR reporting to their sell-side counterparties. The main reasons are that they are struggling to get all the data which is required to create acceptable reports, the complexity in the SFTR reporting flows, lack of experienced resources and the fact that most buy-side firms involved in SFTs are mainly trading with the sell-side firms.
However, although the reporting process can be delegated, they cannot delegate the responsibility to their counterparties. This means that buy-side firms are still obliged to understand every detail of SFTR and they need to prove that they have effective compliance oversight processes in place.
These oversight and control processes are expected of the delegating institutions under SFTR, but then the cost of ensuring the required degree of ‘effectiveness’ can neutralise, or even outweigh, the obvious advantages of delegation, especially when several counterparties or intermediaries are involved.
Under EMIR, we have experienced a quite similar situation. At the very beginning, many buy-side firms decided to outsource their reporting processes to the sell side. After the regulators have been more active in their oversight exercises, they have discovered that many buy-side firms did not have the right controls and oversight processes in place without any plans to do so. After analysing these requirements, many buy-side firms have insourced the reporting process afterwards as they figured out that these control processes are much more time and resources consuming than the actual reporting processes, especially as the regulation left a lot of room for interpretation.
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