EXCLUSIVE: Two-thirds of firms will not be fully ready for SFTR go-live, survey shows
17 September 2019 London
Image: Shutterstock
A survey of securities financing industry participants has revealed that the majority of firms are still in the early stages of preparing for the reporting requirements of the Securities Financing Transactions Regulation (SFTR), while two-thirds do not expect to be fully ready by the April 2020 deadline.
Regulatory reporting service provider Cappitech surveyed 87 banks, asset managers, trade repositories, agent lenders, brokers and non-financial entities in August and early September to review the industry’s state of readiness ahead of next year’s deadline.
Of the respondents, 65 confirmed they would be in-scope for SFTR’s reporting obligations.
In total, 40.2 percent of respondents are headquartered in the UK and 31.9 percent are EU based.
In terms of general readiness, nearly two-thirds of respondents said they haven’t started the implementation of their SFTR solution, as of September.
Just over 63 percent of respondents are either in the planning phase or pre-planning phase.
Of this section, 11.5 percent had not started planning, while 32 percent had started planning and 19.5 percent claim to have made significant progress in planning.
Meanwhile, the survey results indicated that 28 percent of participants had started implementation, while only 9 percent claimed to be fully ready for SFTR.
Regarding testing of SFTR solutions, nearly 11 percent of respondents said they were not planning to test at all, while 7 percent responded that they would only test in the final month ahead of go-live. Moreover, approximately 54 percent stated that they only expected to be ready to test in the final three months prior to go-live.
Commenting on the results, Jonathan Lee, senior regulatory reporting specialist at Kaizen Reporting, said: “We would caution that these dates have a tendency to slip and that three months will not necessarily prove sufficient to launch such a large and complex reporting regime. Both Kaizen and Cappitech clients have seen many reporting parties suffer major setbacks in their regulatory programme deliveries and consequently only perform the very minimum of testing very late in the day.”
“This has very negative implications for data quality and regulatory compliance.”
Touching on the reasons why so many firms appear to be in jeopardy of missing the April deadline, Ronen Kertis, CEO of Cappitech, explained that the industry experienced a similar scenario with the implementation of the Markets in Financial Instruments Regulation and the European Market Infrastructure Regulation. Kertis noted that nine or six months before those regulations went live, a lot of firms weren’t ready or even in the implementation phase and that it had an effect on the quality of data that was reported in the first month of go-live.
According to Kertis, the survey results indicate that some in the industry have not learned the lessons from navigating the builds for previous regulations and have continued to prepare in the eleventh-hour.
Lee added: “For UK-based firms, Brexit is going to be high on the agenda for the immediate future. But also, there is still an element of uncertainty generally. Where we had the level-three European Securities and Markets Authority technical guidance notes published earlier in the summer, they in many ways asked more questions than they answered.”
As a result, Lee explained, some firms are holding back from committing to a build until they get further clarity from the final guidance notes due in Q4.
“There has to be a leap of faith in certain areas such as the need to provide full reports for errors and modifications, rather than delta reports. The timeline is such that if you’re involved in the first phase of go-live then you can’t hold back any longer,” he said.
“Given that this is a completely new regulatory environment, as we don’t historically have a transaction reporting regime for the securities finance business, it’s key to get yourself in a position where you run something in parallel for some period to really bed the system in, with the knowledge and understanding, and to remediate any immediate issues.”
Moreover, Lee explained that both EU- and UK-based firms are still hampered in their build schedules by the fact that several TRs have only just begun user acceptance testing and haven’t set their pricing yet. As a result, more than 40 percent of respondents still haven’t decided which TR they are intending to use.
According to Lee, this combination of factors has caused a situation where only 37 percent of respondents expect to be fully ready for SFTR on time.
Elsewhere, the survey highlighted several areas where respondents had lingering concerns around compliance with the regulation.
Unique trade identifier (UTI) sharing and matching featured prominently among respondents’ fears for the future, with 54 percent feeling the need to implement UTI matching (with 33.3 percent not sure) and over 70 percent of respondents wishing to use a vendor to match UTIs.
Lee described the responses as encouraging given that UTIs will be the basis of any paired trade.
“Unfortunately, with the multitude of SFTR matchable fields, a paired trade is still a very long way from being a fully matched trade or necessarily accurately reported trade,” he said.
Other concerns raised included re-use obligations, reporting valuation and collateral changes and understanding lifecycle events.
Nearly 43 percent of respondents were unsure about defining re-use obligations, while another 43 percent had questions about to manage changes to collateral and 41.5 percent wanted more information on lifecycle events, which have not traditionally been a key area of focus in securities financing.
Meanwhile, more than 35 percent of respondents were concerned with gathering product international securities identification numbers and issuer legal entity identifiers (LEIs).
According to Lee, this percentage was lower than he expected for this issue given it may well prove the greatest impediment to producing a valid transaction report, unless the validation rules are eased to allow for securities that don’t currently have an issuer LEI.
Concerns around issuer LEIs for SFTR were also recently raised by the International Securities Lending Association (ISLA) in a separate market survey.
In its report on a market survey, published earlier this month, ISLA highlighted that roughly 34 percent of assets managed by custodial banks are missing the required asset issuer data to complete an LEI under SFTR.
ISLA’s report also references data from a large securities lending data aggregator, which offers a dataset of LEI coverage relating to actively lent/borrowed assets for different markets around the world.
The data shows a high level of asset issuer LEI coverage in many EU jurisdictions, including Sweden (97 percent), which has the highest coverage of all surveyed markets, Spain (96 percent), Italy (96 percent) and France (92 percent).
However, several EU nations were also shown to be lagging, such as Ireland (43 percent) and the UK (75 percent).
The full results of the Cappitech survey can be read here.
Regulatory reporting service provider Cappitech surveyed 87 banks, asset managers, trade repositories, agent lenders, brokers and non-financial entities in August and early September to review the industry’s state of readiness ahead of next year’s deadline.
Of the respondents, 65 confirmed they would be in-scope for SFTR’s reporting obligations.
In total, 40.2 percent of respondents are headquartered in the UK and 31.9 percent are EU based.
In terms of general readiness, nearly two-thirds of respondents said they haven’t started the implementation of their SFTR solution, as of September.
Just over 63 percent of respondents are either in the planning phase or pre-planning phase.
Of this section, 11.5 percent had not started planning, while 32 percent had started planning and 19.5 percent claim to have made significant progress in planning.
Meanwhile, the survey results indicated that 28 percent of participants had started implementation, while only 9 percent claimed to be fully ready for SFTR.
Regarding testing of SFTR solutions, nearly 11 percent of respondents said they were not planning to test at all, while 7 percent responded that they would only test in the final month ahead of go-live. Moreover, approximately 54 percent stated that they only expected to be ready to test in the final three months prior to go-live.
Commenting on the results, Jonathan Lee, senior regulatory reporting specialist at Kaizen Reporting, said: “We would caution that these dates have a tendency to slip and that three months will not necessarily prove sufficient to launch such a large and complex reporting regime. Both Kaizen and Cappitech clients have seen many reporting parties suffer major setbacks in their regulatory programme deliveries and consequently only perform the very minimum of testing very late in the day.”
“This has very negative implications for data quality and regulatory compliance.”
Touching on the reasons why so many firms appear to be in jeopardy of missing the April deadline, Ronen Kertis, CEO of Cappitech, explained that the industry experienced a similar scenario with the implementation of the Markets in Financial Instruments Regulation and the European Market Infrastructure Regulation. Kertis noted that nine or six months before those regulations went live, a lot of firms weren’t ready or even in the implementation phase and that it had an effect on the quality of data that was reported in the first month of go-live.
According to Kertis, the survey results indicate that some in the industry have not learned the lessons from navigating the builds for previous regulations and have continued to prepare in the eleventh-hour.
Lee added: “For UK-based firms, Brexit is going to be high on the agenda for the immediate future. But also, there is still an element of uncertainty generally. Where we had the level-three European Securities and Markets Authority technical guidance notes published earlier in the summer, they in many ways asked more questions than they answered.”
As a result, Lee explained, some firms are holding back from committing to a build until they get further clarity from the final guidance notes due in Q4.
“There has to be a leap of faith in certain areas such as the need to provide full reports for errors and modifications, rather than delta reports. The timeline is such that if you’re involved in the first phase of go-live then you can’t hold back any longer,” he said.
“Given that this is a completely new regulatory environment, as we don’t historically have a transaction reporting regime for the securities finance business, it’s key to get yourself in a position where you run something in parallel for some period to really bed the system in, with the knowledge and understanding, and to remediate any immediate issues.”
Moreover, Lee explained that both EU- and UK-based firms are still hampered in their build schedules by the fact that several TRs have only just begun user acceptance testing and haven’t set their pricing yet. As a result, more than 40 percent of respondents still haven’t decided which TR they are intending to use.
According to Lee, this combination of factors has caused a situation where only 37 percent of respondents expect to be fully ready for SFTR on time.
Elsewhere, the survey highlighted several areas where respondents had lingering concerns around compliance with the regulation.
Unique trade identifier (UTI) sharing and matching featured prominently among respondents’ fears for the future, with 54 percent feeling the need to implement UTI matching (with 33.3 percent not sure) and over 70 percent of respondents wishing to use a vendor to match UTIs.
Lee described the responses as encouraging given that UTIs will be the basis of any paired trade.
“Unfortunately, with the multitude of SFTR matchable fields, a paired trade is still a very long way from being a fully matched trade or necessarily accurately reported trade,” he said.
Other concerns raised included re-use obligations, reporting valuation and collateral changes and understanding lifecycle events.
Nearly 43 percent of respondents were unsure about defining re-use obligations, while another 43 percent had questions about to manage changes to collateral and 41.5 percent wanted more information on lifecycle events, which have not traditionally been a key area of focus in securities financing.
Meanwhile, more than 35 percent of respondents were concerned with gathering product international securities identification numbers and issuer legal entity identifiers (LEIs).
According to Lee, this percentage was lower than he expected for this issue given it may well prove the greatest impediment to producing a valid transaction report, unless the validation rules are eased to allow for securities that don’t currently have an issuer LEI.
Concerns around issuer LEIs for SFTR were also recently raised by the International Securities Lending Association (ISLA) in a separate market survey.
In its report on a market survey, published earlier this month, ISLA highlighted that roughly 34 percent of assets managed by custodial banks are missing the required asset issuer data to complete an LEI under SFTR.
ISLA’s report also references data from a large securities lending data aggregator, which offers a dataset of LEI coverage relating to actively lent/borrowed assets for different markets around the world.
The data shows a high level of asset issuer LEI coverage in many EU jurisdictions, including Sweden (97 percent), which has the highest coverage of all surveyed markets, Spain (96 percent), Italy (96 percent) and France (92 percent).
However, several EU nations were also shown to be lagging, such as Ireland (43 percent) and the UK (75 percent).
The full results of the Cappitech survey can be read here.
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