SFTR will see some firms stop securities finance, says Simcorp product manager
23 November 2018 London
Image: Shutterstock
The Securities Financing Transactions Regulation (SFTR) will see some firms stop securities finance activity altogether, according to Gernot Schmidt, product manager of regulation at SimCorp.
In commentary on the regulation, which explores SFTR’s impact on the buy side, Schmidt explained that some asset owners have voiced concerns that Asian non-EU firms may conclude that European SFTR reporting is either too difficult, expensive or intrusive when weighed against prospective returns.
He said: “The same is expected for Middle Eastern sovereign wealth funds who currently deal with securities financing transactions in the European market. Or they may decide to redirect their trading strategies towards non-EU collateral counterparts to avoid the problem altogether.”
SFTR threatens to affect firms across the board, including banks, investment firms, central counterparties (CCPs), central securities depositories, insurance, reinsurance, undertakings, pension funds, UCITS, alternative investment funds, and non-financial counterparties (NFCs).
Firms must prepare for SFTR as it closes in—as early as Q1 2020—to keep up with the regulation’s reporting requirements and avoid being left behind.
SFTR will require financial counterparties and NFCs to report their securities financing transactions to an approved registered EU trade repository.
Structurally, it is the same as reporting under the European Market Infrastructure Regulation (EMIR), requiring two-sided T+1 reporting. However, SFTR also expects firms to disclose requirements to investors and collateral reuse obligations.
Two of SFTR’s three pillars are already live. The first being disclosure requirement, which means funds must disclose the usage of securities financing transactions and total return swaps.
The second pillar mandates collateral reuse with the permission of the collateral provider. The third pillar is the securities financing transaction reporting requirement. This covers repos, buy-sell backs, margin lending, and securities lending. There are 153 fields to report, compared to 129 fields under EMIR.
Despite its complexity, Schmidt stated there are some opportunities available under the change.
He remarked: “The benefits of increased organisational transparency can be manifold and regulations such as SFTR can trigger productive and constructive change, including competitive advantage, which may create further interest in the market.”
Schmidt added: “Firms can also leverage business workflows around securities financing, be it optimisation of collateral or cross collateralisation between over-the-counters and SFTs (if you clear them on the same CCP).”
Schmidt went on to discuss how Simcorp is helping its clients to be ready for the regulation’s implementation date. He stated: “SimCorp is developing an SFTR solution for its clients. This solution will provide clients with simplified implementation.”
“Subject to the trade repositories readiness and finalisation of regulation, it would be ready for testing in H2/2019 to provide the buy-side enough time ahead of the regulation coming into play Q1/Q2 2020.”
Schmidt predicted that given the complexity inherent to SFTR, the regulation will be at least be as disruptive has EMIR and MiFIR transaction reporting has been.
He added: “The pace of regulation has meant it has become all too common for many firms to continue to take a tactical approach, rather than take a step back to view the long-term picture and see what change is required.”
He affirmed: “The problem with this is firms are caught short, rushing through these regulations as IT projects instead of business strategies. As a result, they often add to an already inefficient front-to-back office architecture.”
“A change in approach is necessary. With a raft of regulatory changes taking effect in 2018, operational transparency may just be the antidote needed to counteract this continually complex investment management landscape.”
In commentary on the regulation, which explores SFTR’s impact on the buy side, Schmidt explained that some asset owners have voiced concerns that Asian non-EU firms may conclude that European SFTR reporting is either too difficult, expensive or intrusive when weighed against prospective returns.
He said: “The same is expected for Middle Eastern sovereign wealth funds who currently deal with securities financing transactions in the European market. Or they may decide to redirect their trading strategies towards non-EU collateral counterparts to avoid the problem altogether.”
SFTR threatens to affect firms across the board, including banks, investment firms, central counterparties (CCPs), central securities depositories, insurance, reinsurance, undertakings, pension funds, UCITS, alternative investment funds, and non-financial counterparties (NFCs).
Firms must prepare for SFTR as it closes in—as early as Q1 2020—to keep up with the regulation’s reporting requirements and avoid being left behind.
SFTR will require financial counterparties and NFCs to report their securities financing transactions to an approved registered EU trade repository.
Structurally, it is the same as reporting under the European Market Infrastructure Regulation (EMIR), requiring two-sided T+1 reporting. However, SFTR also expects firms to disclose requirements to investors and collateral reuse obligations.
Two of SFTR’s three pillars are already live. The first being disclosure requirement, which means funds must disclose the usage of securities financing transactions and total return swaps.
The second pillar mandates collateral reuse with the permission of the collateral provider. The third pillar is the securities financing transaction reporting requirement. This covers repos, buy-sell backs, margin lending, and securities lending. There are 153 fields to report, compared to 129 fields under EMIR.
Despite its complexity, Schmidt stated there are some opportunities available under the change.
He remarked: “The benefits of increased organisational transparency can be manifold and regulations such as SFTR can trigger productive and constructive change, including competitive advantage, which may create further interest in the market.”
Schmidt added: “Firms can also leverage business workflows around securities financing, be it optimisation of collateral or cross collateralisation between over-the-counters and SFTs (if you clear them on the same CCP).”
Schmidt went on to discuss how Simcorp is helping its clients to be ready for the regulation’s implementation date. He stated: “SimCorp is developing an SFTR solution for its clients. This solution will provide clients with simplified implementation.”
“Subject to the trade repositories readiness and finalisation of regulation, it would be ready for testing in H2/2019 to provide the buy-side enough time ahead of the regulation coming into play Q1/Q2 2020.”
Schmidt predicted that given the complexity inherent to SFTR, the regulation will be at least be as disruptive has EMIR and MiFIR transaction reporting has been.
He added: “The pace of regulation has meant it has become all too common for many firms to continue to take a tactical approach, rather than take a step back to view the long-term picture and see what change is required.”
He affirmed: “The problem with this is firms are caught short, rushing through these regulations as IT projects instead of business strategies. As a result, they often add to an already inefficient front-to-back office architecture.”
“A change in approach is necessary. With a raft of regulatory changes taking effect in 2018, operational transparency may just be the antidote needed to counteract this continually complex investment management landscape.”
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