While the coronavirus pandemic delayed the start of the European Securities and Markets Authority’s (ESMA’s) Securities Financing Transactions Regulation (SFTR) to 13 July and gave the broker-dealer community more time to prepare, buy-side firms must still work to address any remaining reporting challenges and complete testing to ensure readiness ahead of their October go-live.
How has DTCC been getting clients ready for SFTR?
Even before COVID-19 appeared on the horizon, SFTR created a perfect storm of data and operational challenges for banks and asset managers engaged in repo trading, securities lending and collateral reuse. As a result, we’ve been preparing clients for several years now to address these challenges. We began by working with the industry to design a solution that leverages the trade reporting efficiency and security of our existing licenced/registered trade repositories (TRs). We then built an additional set of tools that help firms manage their data on the front and back ends of actual trade submissions. And, as go-live approaches, we rolled out comprehensive onboarding, testing and production support.
Describe how your SFTR solution works?
From our conversations with market participants, we realised the industry needed an SFTR solution that can alleviate the stress on in-house technology and staff by offering a comprehensive menu of customisable features along with full-service client support. The solution we designed addresses the particular pain points of SFTR by offering both our Global Trade Repository (GTR) services – derivatives reporting through registered or licensed trade repositories in various jurisdictions globally – and DTCC Report Hub services, an optional, customisable suite of pre- and post-reporting data and reconciliation tools.
GTR is the largest TR service in the world, serving more than 5,200 firms across multiple jurisdictions. Since 2012, GTR has delivered efficient, secure trade reporting for OTC and exchange-traded derivatives and this track record has given firms, large and small, the confidence they can entrust their SFT reporting to us.
We created our DTCC Report Hub services to meet the varying needs of a diverse client base. Users can choose from an array of services and put together a package that’s relevant to their objectives and capabilities.
Describe your testing programme in more detail and how you’re addressing buy-side testing concerns?
From the outset, we committed to provide an extended period of user acceptance testing (UAT) so clients can work out any kinks and raise their levels of preparedness. We launched vendor UAT in August 2019, followed by industry-wide UAT starting in October. Subsequent phases have added more functionality including testing of production connectivity and submission of messages. Through our SFTR portal, users can set up end-of-day reports and view all their reported data and reconciliation results online.
While dealers were the first to take advantage of early testing, buy-side firms may find our comprehensive testing program even more useful, as they tend to run on thinner in-house resources.
In May, we further boosted our buy-side testing support by making Delta Capita’s SFTR data test pack directly available to DTCC’s buy-side clients. This test pack is considered the industry standard for promoting SFTR readiness. It lets firms rehearse various SFT lifecycle event scenarios so they can fix any problems that show up. They can also benchmark their testing progress against their peer group.
What kinds of SFTR readiness issues distinguish the buy-side from the dealer community?
First, let’s recognise what the buy-side and sell-side have in common. Even as reporting mandates have become increasingly complex, in-house procedures and technology needed for reporting have not kept pace in terms of efficiency and rationalisation. Firms struggle to coordinate and deploy their IT systems and compliance teams to gather the data necessary for reporting, configure it properly, and harmonize reported trade data with internal books and records. Systems for data collection and processing are often fragmented and duplicated, and the technology upgrades necessary to keep pace with regulatory changes are expensive.
That said, buy-side firms do carry some unique burdens. For one, they are having to get ready for an October SFTR implementation while at the same time preparing for Brexit to take effect at the end of December. Adding to that, most of them are falling within scope of the Uncleared Margin Rules (UMR) when phases five and six take effect in September 2021 and September 2022, respectively. And the Central Securities Depositories Regulation’s (CSDR’s) settlement discipline regime goes live 1 February 2021.
Managing compliance with all these mandates simultaneously would stress any firm, regardless of size and capabilities, but most on the buy-side will face greater operational and data challenges than their dealer counterparties due to the fact they have comparatively fewer technology and staffing resources.
What’s the best way to address the operational and data issues around SFTR?
We’ve observed in working with our GTR user community on derivatives trade reporting that firms need a flexible suite of solutions that help them manage the entire activity chain preceding and following the submission of transaction data to a TR since so much of the work happens in the pre- and post-reporting phases.
This year we launched such a multi-functional toolbox, the DTCC Report Hub service, to transform the trade reporting process for buy-side and dealer firms of all sizes. Before submitting trade data to a DTCC TR, DTCC Report Hub services enable users to normalize, translate, pre-validate and enrich data from multiple sources. Following submission, these services can be used to reconcile end-of-day reports against client books and records or facilitate third-party access to trade data.
DTCC Report Hub service offerings are available to dealers and buy-side firms as well as other involved parties such as agent lenders. But we expect it to be especially valuable to buy-side firms because it eliminates the need for users to build in-house capabilities for data transformation, third-party access, exception management and reconciliation.
By offering both TR services and the DTCC Report Hub services, SFT reporting is more efficient. So is the user experience, thanks to a single sign-on portal and common user interface. Users can customise their service packages; some will opt to utilise all features while others may use only one or two.
Are some pain points especially acute for the buy-side?
We’ve worked hard to understand the pain points around SFTR compliance that are unique to the buy-side. An SFTR briefing DTCC hosted last September jointly with IHS Market and Pirum Systems was especially helpful. Of the nearly 50 buy-side firms that participated, almost half said their biggest challenge will be sourcing the transaction data required for regulatory reporting. Generation and use of unique trade identifiers (UTIs) was another top concern. Pre-SFTR, the securities financing markets, including repo markets, did not require UTIs. But the new regulation mandates that transactions be paired – using counterparties’ UTIs and LEIs – and matched in a TR on a T+1 basis, effectively forcing counterparties to generate and exchange UTIs before reporting their trades.
Other issues mentioned were delegated reporting, which means delegating your own transaction reporting to your counterparty or a third-party service provider; and the use of vendors – i.e., when to outsource various compliance tasks versus performing them in-house, and how to select the right vendors.
Speaking of delegated reporting, what are its pros and cons for buy-side firms?
On the one hand, delegated reporting can alleviate some burdens of transaction reporting. However, firms should be mindful that it doesn’t release them from the legal obligation to ensure their reporting is performed accurately and on time and to be ready to supply detailed information in case of an audit or regulatory review.
Additionally, delegating your reporting will make it difficult to comply with SFTR’s requirement to report on the reuse of your underlying collateral at the entity, rather than trade, level. Because only the asset owner can know this information, a firm’s dealer or agent lender that has been delegated to report the firm’s trades could not meet this requirement.
We asked an audience of buy-side attendees at a March 2020 webinar about their plans to delegate and the results reflected these challenges. While the extent to which firms plan to delegate was mixed – a total of 71 percent indicated they plan to delegate at least a portion of their reporting, with nearly a third planning to delegate everything but collateral re-use – the remaining 29 percent said that they are committed to self-reporting all in-scope transactions.
For those who self-report, DTCC Report Hub services can help firms transform their data into the required ISO 20022 XML message format, pre-validate submissions and manage exceptions before submitting the transactions to a DTCC TR. DTCC Report Hub reconciliation services reinforce the accuracy and timeliness of their submissions by reconciling GTR end-of-day reports against the data submitted from their internal books and records and data submitted to the GTR TR.
Do you envision expanding the use of DTCC Report Hub services beyond SFTR?
Yes. We are evaluating extending DTCC Report Hub services to all OTC derivatives asset classes for derivatives reporting in all jurisdictions, with the goal of establishing a fully mutualised infrastructure for regulatory reporting.
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