The final countdown
20 March 2018
With less than a year to go, the financial services industry should be well into the preparation stages of SFTR. As the final countdown begins, industry participants speculate on the challenges and opportunities the regulation could bring
Image: Shutterstock
With the Securities Financing Transactions Regulation (SFTR) implementation less than 12 months away, the financial services industry should be well into its preparation stage.
Following the recommendation by the Financial Stability Board (FSB) and European Systemic Risk Board (ESRB) to mitigate the inherent risks in shadow banking and increase transparency in the use securities lending and repo, the European Commission published SFTR in January 2016.
Securities financing transactions are any transaction where securities are used to borrow cash or vice versa.
Sejal Amin, head of membership services and events at ISLA, suggests that SFTR will fundamentally change the global securities lending market.
She says: “In terms of the UK, what is unclear is what role the Financial Conduct Authority will play in the context of SFTR in a post-Brexit world.”
Andreas Ferrise, compliance officer, UnaVista, the London Stock Exchange Group (LSEG), explains that SFTR represents a “significant move towards enhanced transparency in the securities lending market and risks reduction associated with shadow banking”.
However, Ferrise suggests that from a regulatory standpoint, market players will face various challenges once the regulation goes live in Q2 2019.
Ferrise notes that the collateral re-use practice could lead to complex collateral chains, especially referring to situations where there is extensive rehypothecation, meaning the same collateral will need to be reported several times.
Another situation, he suggests, could be where pools of collateral are used against multiple trades, causing difficulty allocating each element of the collateral against a specific transaction. He also explains that wila default on one transaction can cause a domino effect with other counterparties defaulting on their respective securities financing transactions if the same collateral has been used in all of these.
SFTR will require daily reporting of all securities financing transactions including securities lending transactions to ESMA as part of the financial stability mandate.
Andrew Dyson, CEO of the International Securities Lending Association, says: “We are still waiting for the European Commission to start the formal adoption process of the draft technical standards for the SFTR that were published by ESMA in March 2017, but we expect the reporting obligation, that sits with the parties to a securities loan, to commence in mid-2019.”
SFTR covers EU counterparties, non-EU branches of EU firms and EU branches of third country firms. According to Ferrise, market participants are concerned about the involvement of non-EU counterparties in the reporting chain.
Ferrise says: “These may be impacted when they trade in securities financing transactions, as the reporting entities will be required to obtain certain information to fulfil their reporting obligations, for instance, the legal entity identifier (LEI) of their counterparty or matching unique transaction identifiers (UTIs).”
“When SFTR transaction reporting goes live in 2019 firms will be able to report all of their securities financing transactions to UnaVista. UnaVista is already an EU-registered Trade Repository for European Market Infrastructure Regulation (EMIR) and will be extending our capabilities to cover SFTR reporting.”
The UK securities lending market and the rest of the financial services industry was “committed and worked very hard” for the launch of the second Markets in Financial Instruments Directive (MiFID II).
Ferrise explains: “It is evident now that market participants need to analyse the impact across firms in terms of resources and budget to be compliant in time for SFTR reporting.”
“Currently, many firms are considering whether to assign additional resources for the completion of MiFID II and to begin the build-up and implementation of operational models and infrastructure for SFTR.”
However, he suggests that this uncertainty may have a “detrimental effect on the success of other projects as SFTR”.
He says: “It is quite evident by now that the SFTR is more than a simple trade reporting practice, which impacts a wide-range of financial and non-financial firms.”
However, Ferrise adds that the real challenge for regulators is to ensure a high level of data quality. The industry should have already started planning and implementing all the necessary measures to tackle this mandate.
In ISLA’s recently published Securities Lending Market Report, Jo Hide, trade repository SME at REGIS-TR, explains: “This time next year, we expect firms will be progressing well through their SFTR transaction reporting projects and gearing up to start sending the first records to trade repositories (TRs) across Europe.”
“As with over-the-counter (OTC) derivatives before, this transaction reporting is a new endeavour in the securities financing and repo world, with new terminology, new workflows and, inevitably, new concerns arising as the reporting start date approaches,”, Hide says.
Commenting further on SFTR, Hide cited ISO 20022 as a “great benefit” in preparation for the regulation.“So much of the data validation is contained within the format definition—the successful creation of a file already guarantees the quality of a great deal of the data you’re submitting, before it even reaches the TRs,” Hide adds.
Hide concludes there are three main things that the industry can do to help make a success of SFTR. These include ensuring the unique transaction identifiers have not already been used for another trade and validating certain data against reference data lists—for example, legal entity identifier, currency codes, venue codes.
Records which pass all the checks will be submitted to the TR. For those which don’t, the firm will need to correct the errors and re-submit the affected records within the
reporting deadline.
The new regulation could also bring opportunity the industry. Broadridge recently suggested that incoming regulations, such as SFTR, that require vast amounts of data generation could pave the way for the introduction of artificial intelligence.
The data that will come from compliance with SFTR could allow firms to employ artificial intelligence to “second guess moves by counterparties, clients and regulators and central counterparties”, Broadridge predicted in a recent whitepaper.
The paper stated: “For example, regulators may react to certain trends in the SFTR data that signal a buildup of risk by raising haircut floors or increasing capital requirements. If market participants can use artificial technology to predict better when this type of activity will occur, along with other key events such as bond market squeezes, then this can inform strategic
decision making.”
“This could provide an opportunity to apply cognitive computing algorithms against SFTR and EMIR data.”
Following the recommendation by the Financial Stability Board (FSB) and European Systemic Risk Board (ESRB) to mitigate the inherent risks in shadow banking and increase transparency in the use securities lending and repo, the European Commission published SFTR in January 2016.
Securities financing transactions are any transaction where securities are used to borrow cash or vice versa.
Sejal Amin, head of membership services and events at ISLA, suggests that SFTR will fundamentally change the global securities lending market.
She says: “In terms of the UK, what is unclear is what role the Financial Conduct Authority will play in the context of SFTR in a post-Brexit world.”
Andreas Ferrise, compliance officer, UnaVista, the London Stock Exchange Group (LSEG), explains that SFTR represents a “significant move towards enhanced transparency in the securities lending market and risks reduction associated with shadow banking”.
However, Ferrise suggests that from a regulatory standpoint, market players will face various challenges once the regulation goes live in Q2 2019.
Ferrise notes that the collateral re-use practice could lead to complex collateral chains, especially referring to situations where there is extensive rehypothecation, meaning the same collateral will need to be reported several times.
Another situation, he suggests, could be where pools of collateral are used against multiple trades, causing difficulty allocating each element of the collateral against a specific transaction. He also explains that wila default on one transaction can cause a domino effect with other counterparties defaulting on their respective securities financing transactions if the same collateral has been used in all of these.
SFTR will require daily reporting of all securities financing transactions including securities lending transactions to ESMA as part of the financial stability mandate.
Andrew Dyson, CEO of the International Securities Lending Association, says: “We are still waiting for the European Commission to start the formal adoption process of the draft technical standards for the SFTR that were published by ESMA in March 2017, but we expect the reporting obligation, that sits with the parties to a securities loan, to commence in mid-2019.”
SFTR covers EU counterparties, non-EU branches of EU firms and EU branches of third country firms. According to Ferrise, market participants are concerned about the involvement of non-EU counterparties in the reporting chain.
Ferrise says: “These may be impacted when they trade in securities financing transactions, as the reporting entities will be required to obtain certain information to fulfil their reporting obligations, for instance, the legal entity identifier (LEI) of their counterparty or matching unique transaction identifiers (UTIs).”
“When SFTR transaction reporting goes live in 2019 firms will be able to report all of their securities financing transactions to UnaVista. UnaVista is already an EU-registered Trade Repository for European Market Infrastructure Regulation (EMIR) and will be extending our capabilities to cover SFTR reporting.”
The UK securities lending market and the rest of the financial services industry was “committed and worked very hard” for the launch of the second Markets in Financial Instruments Directive (MiFID II).
Ferrise explains: “It is evident now that market participants need to analyse the impact across firms in terms of resources and budget to be compliant in time for SFTR reporting.”
“Currently, many firms are considering whether to assign additional resources for the completion of MiFID II and to begin the build-up and implementation of operational models and infrastructure for SFTR.”
However, he suggests that this uncertainty may have a “detrimental effect on the success of other projects as SFTR”.
He says: “It is quite evident by now that the SFTR is more than a simple trade reporting practice, which impacts a wide-range of financial and non-financial firms.”
However, Ferrise adds that the real challenge for regulators is to ensure a high level of data quality. The industry should have already started planning and implementing all the necessary measures to tackle this mandate.
In ISLA’s recently published Securities Lending Market Report, Jo Hide, trade repository SME at REGIS-TR, explains: “This time next year, we expect firms will be progressing well through their SFTR transaction reporting projects and gearing up to start sending the first records to trade repositories (TRs) across Europe.”
“As with over-the-counter (OTC) derivatives before, this transaction reporting is a new endeavour in the securities financing and repo world, with new terminology, new workflows and, inevitably, new concerns arising as the reporting start date approaches,”, Hide says.
Commenting further on SFTR, Hide cited ISO 20022 as a “great benefit” in preparation for the regulation.“So much of the data validation is contained within the format definition—the successful creation of a file already guarantees the quality of a great deal of the data you’re submitting, before it even reaches the TRs,” Hide adds.
Hide concludes there are three main things that the industry can do to help make a success of SFTR. These include ensuring the unique transaction identifiers have not already been used for another trade and validating certain data against reference data lists—for example, legal entity identifier, currency codes, venue codes.
Records which pass all the checks will be submitted to the TR. For those which don’t, the firm will need to correct the errors and re-submit the affected records within the
reporting deadline.
The new regulation could also bring opportunity the industry. Broadridge recently suggested that incoming regulations, such as SFTR, that require vast amounts of data generation could pave the way for the introduction of artificial intelligence.
The data that will come from compliance with SFTR could allow firms to employ artificial intelligence to “second guess moves by counterparties, clients and regulators and central counterparties”, Broadridge predicted in a recent whitepaper.
The paper stated: “For example, regulators may react to certain trends in the SFTR data that signal a buildup of risk by raising haircut floors or increasing capital requirements. If market participants can use artificial technology to predict better when this type of activity will occur, along with other key events such as bond market squeezes, then this can inform strategic
decision making.”
“This could provide an opportunity to apply cognitive computing algorithms against SFTR and EMIR data.”
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
