SFTR: A driver of innovation
03 May 2018
Tom Pikett of Trax explains why SFTR is a catalyst to create more efficiency, automation and technological process
Image: Shutterstock
It’s not often thought that regulation can help drive innovation, but in the case of the securities financing industry, Securities Financing Transaction Regulation (SFTR) is a catalyst to help create more efficiency, automation and technological progress. Securities financing, including repo, notoriously is made up of manual markets relying heavily on voice transactions and fax and email confirmations. With SFTR, regulators appear to have taken note of outdated processes and listened to the call for change, perhaps having learned lessons from previous regulatory reporting implementations.
European Market Infrastructure Regulation (EMIR) came into force in February 2014 and is known to have been plagued with a number of issues surrounding implementation. Fundamentally the EMIR implementation suffered from a lack of clarity, a lack of standardisation and varied implementations at the trade repositories. This has not been repeated. For example, European Securities and Markets Authority (ESMA) has mandated the use of ISO 20022 for reports going to and from the repositories, marking a significant shift away from the model under EMIR where message specifications varied greatly between repositories.
The drafting of SFTR has also taken note of regulations that have helped accelerate the adoption of more efficient practices. In the case of the second Markets in Financial Instruments Directive (MiFID II), the reporting, transparency and best execution obligations brought on by the regulation had the knock-on effect of encouraging more on-venue trading, thus improving market efficiency and insight. Similarly, SFTR, with its 153 reporting fields and extensive matching requirements, is sufficiently burdensome that without automation the operational overheads will start to become very large indeed.
How will SFTR impact the market?
The securities finance market, in particular the securities lending and bilateral repo markets, are set for a period of significant change as a result of SFTR. Areas that will be heavily impacted by SFTR are: confirmation, reporting, reconciliations, connectivity, messaging, valuation and risk, trade capture and collateral management—an extensive group. This is particularly pertinent given the increase in the overall size of the repo market, with the latest International Capital Market Association (ICMA) survey highlighting that the baseline size of the European repo market reached €7.2 trillion—the largest figure ever recorded since the survey began in 2001. More importantly for SFTR, the number of bilateral trades has continued to grow, with each percentage increase representing additional manual burden on the middle office and potentially increased operational cost.
Within the securities lending market, the changes are far reaching with more fundamental market structure changes anticipated. At a very basic level, the information regarding who borrowers are ultimately trading with will be made available to teams other than the credit risk areas that historically have been the recipients of the agent lender disclosure (ALD). This adds another layer of complexity.
It isn’t simply a case of agent lenders having to disclose who the underlying principal is, there is also a requirement to match on a vast number of economic and reference data fields within very limited tolerances. This reporting burden is generally accepted as something agent lenders will take on for their clients. However, this presents two main challenges for most agent lenders. Firstly, they commonly have very little, if any, experience of transaction reporting. Secondly, we have seen that clients want comfort from the agent lenders that they are submitting the report correctly, particularly given the more prescriptive approach regulators have taken on control and oversight of transaction reporting. With all of this to consider, a greater use of automated trading and matching is something that will be needed to support a firm’s own reporting, and that of its underlying clients to whom they wish to offer a delegated reporting service.
Repo market
In the repo market, there is a significant level of on-venue trades utilising central counterparties (CCPs), which is mainly restricted to dealer-to-dealer overnight repo trades. Outside of these parameters, longer term or open repos, including dealer-to-client trading, tend to use existing processes that are commonly manual and outdated. We expect SFTR will make manual processing sufficiently difficult and costly, having the following impact:
Bilateral repo trades, where possible, will be moved on to a trading venue (supported by the fact there has been a recent growth in the number of repo multilateral trading facilities, some of which are offering all-to-all trading)
Manual trade management will be replaced by automated processing and confirmation
Trax Match Repo provides pre-settlement trade confirmation solutions to help identify trade errors and manage exceptions early in the trade lifecycle. Responding to the growth of the repo market, Trax Match Repo has seen an increase of 40 percent in the number of trades in the past 12 months, as well as a significant increase in the number of buy- and sell-side firms actively using the platform. With the need to share and match more information under SFTR, we expect this trend to continue.
Securities lending
Within securities lending, compared to the repo market, a greater use of automation through a group of well-established vendors is broadly the norm. However, there are fundamental market structure changes expected to impact the securities lending market, including:
A continued move to trading on-venue, allowing for Unique Trade IDs, timestamps, key economics etc. to be shared at the point of trade. We consider this of particular importance if the principal level information is available at the point of trade, providing the maximum possible time for submission of the SFTR report
Consolidation to a small number of vendors for trading, matching and reporting
There are a select number of vendors who have heritage or expertise in the SFT market. Given the complexities SFTR presents, leveraging a solution with a vertical stack of trading, matching and reporting is a compelling offering. Simply accommodating all trading into a post-trade reconciliation platform may not be the easiest or most comprehensive solution. Reporting firms may ease their SFTR implementation through greater use of a full front-to-back solution, whilst other efficiency gains can be achieved through automating trading flows, confirmations and break resolution. The collaboration between the largest trading platform, EquiLend, and one of the largest repo matching and transaction reporting providers, Trax, allows firms to benefit from such efficiencies, as it enables firms to trade, match and report through one solution.
What next for market participants?
In an increasingly complex world of transaction reporting, with multiple overlapping regimes requesting different levels of data on different frequencies, more and more reporting firms appear to be looking to vendors to ease the burden. Heritage, cross-asset class capabilities and transaction reporting expertise have been notable factors identified by reporting firms when selecting a vendor.
Trax is collaborating with EquiLend to offer a best in class SFTR solution. EquiLend’s expertise in the securities finance industry, combined with Trax’s regulatory reporting and repo trade confirmation heritage, will provide a comprehensive service covering all SFTR-eligible asset classes.
As leading providers of trading, confirmation and post-trade lifecycle management, EquiLend and Trax are ideally placed to solve for the headaches around unique transaction identifier (UTI) generation, timestamps and lifecycle events. EquiLend and Trax receive new trades and lifecycle events on an intra-day basis, allowing for regulatory reporting monitoring on a near real-time basis.
While firms cannot outsource their reporting obligation, they should look to the expertise of solution providers to help them confidently meet their compliance requirements. EquiLend and Trax combine years of experience and expertise to help ensure that firms have access to a solution built in response to industry feedback to mitigate risks. Industry participants can leverage the community fostered by EquiLend and Trax by taking advantage of the collective mind-share and innovation developed through the interoperable solution, helping firms stay a step ahead of regulatory change.
European Market Infrastructure Regulation (EMIR) came into force in February 2014 and is known to have been plagued with a number of issues surrounding implementation. Fundamentally the EMIR implementation suffered from a lack of clarity, a lack of standardisation and varied implementations at the trade repositories. This has not been repeated. For example, European Securities and Markets Authority (ESMA) has mandated the use of ISO 20022 for reports going to and from the repositories, marking a significant shift away from the model under EMIR where message specifications varied greatly between repositories.
The drafting of SFTR has also taken note of regulations that have helped accelerate the adoption of more efficient practices. In the case of the second Markets in Financial Instruments Directive (MiFID II), the reporting, transparency and best execution obligations brought on by the regulation had the knock-on effect of encouraging more on-venue trading, thus improving market efficiency and insight. Similarly, SFTR, with its 153 reporting fields and extensive matching requirements, is sufficiently burdensome that without automation the operational overheads will start to become very large indeed.
How will SFTR impact the market?
The securities finance market, in particular the securities lending and bilateral repo markets, are set for a period of significant change as a result of SFTR. Areas that will be heavily impacted by SFTR are: confirmation, reporting, reconciliations, connectivity, messaging, valuation and risk, trade capture and collateral management—an extensive group. This is particularly pertinent given the increase in the overall size of the repo market, with the latest International Capital Market Association (ICMA) survey highlighting that the baseline size of the European repo market reached €7.2 trillion—the largest figure ever recorded since the survey began in 2001. More importantly for SFTR, the number of bilateral trades has continued to grow, with each percentage increase representing additional manual burden on the middle office and potentially increased operational cost.
Within the securities lending market, the changes are far reaching with more fundamental market structure changes anticipated. At a very basic level, the information regarding who borrowers are ultimately trading with will be made available to teams other than the credit risk areas that historically have been the recipients of the agent lender disclosure (ALD). This adds another layer of complexity.
It isn’t simply a case of agent lenders having to disclose who the underlying principal is, there is also a requirement to match on a vast number of economic and reference data fields within very limited tolerances. This reporting burden is generally accepted as something agent lenders will take on for their clients. However, this presents two main challenges for most agent lenders. Firstly, they commonly have very little, if any, experience of transaction reporting. Secondly, we have seen that clients want comfort from the agent lenders that they are submitting the report correctly, particularly given the more prescriptive approach regulators have taken on control and oversight of transaction reporting. With all of this to consider, a greater use of automated trading and matching is something that will be needed to support a firm’s own reporting, and that of its underlying clients to whom they wish to offer a delegated reporting service.
Repo market
In the repo market, there is a significant level of on-venue trades utilising central counterparties (CCPs), which is mainly restricted to dealer-to-dealer overnight repo trades. Outside of these parameters, longer term or open repos, including dealer-to-client trading, tend to use existing processes that are commonly manual and outdated. We expect SFTR will make manual processing sufficiently difficult and costly, having the following impact:
Bilateral repo trades, where possible, will be moved on to a trading venue (supported by the fact there has been a recent growth in the number of repo multilateral trading facilities, some of which are offering all-to-all trading)
Manual trade management will be replaced by automated processing and confirmation
Trax Match Repo provides pre-settlement trade confirmation solutions to help identify trade errors and manage exceptions early in the trade lifecycle. Responding to the growth of the repo market, Trax Match Repo has seen an increase of 40 percent in the number of trades in the past 12 months, as well as a significant increase in the number of buy- and sell-side firms actively using the platform. With the need to share and match more information under SFTR, we expect this trend to continue.
Securities lending
Within securities lending, compared to the repo market, a greater use of automation through a group of well-established vendors is broadly the norm. However, there are fundamental market structure changes expected to impact the securities lending market, including:
A continued move to trading on-venue, allowing for Unique Trade IDs, timestamps, key economics etc. to be shared at the point of trade. We consider this of particular importance if the principal level information is available at the point of trade, providing the maximum possible time for submission of the SFTR report
Consolidation to a small number of vendors for trading, matching and reporting
There are a select number of vendors who have heritage or expertise in the SFT market. Given the complexities SFTR presents, leveraging a solution with a vertical stack of trading, matching and reporting is a compelling offering. Simply accommodating all trading into a post-trade reconciliation platform may not be the easiest or most comprehensive solution. Reporting firms may ease their SFTR implementation through greater use of a full front-to-back solution, whilst other efficiency gains can be achieved through automating trading flows, confirmations and break resolution. The collaboration between the largest trading platform, EquiLend, and one of the largest repo matching and transaction reporting providers, Trax, allows firms to benefit from such efficiencies, as it enables firms to trade, match and report through one solution.
What next for market participants?
In an increasingly complex world of transaction reporting, with multiple overlapping regimes requesting different levels of data on different frequencies, more and more reporting firms appear to be looking to vendors to ease the burden. Heritage, cross-asset class capabilities and transaction reporting expertise have been notable factors identified by reporting firms when selecting a vendor.
Trax is collaborating with EquiLend to offer a best in class SFTR solution. EquiLend’s expertise in the securities finance industry, combined with Trax’s regulatory reporting and repo trade confirmation heritage, will provide a comprehensive service covering all SFTR-eligible asset classes.
As leading providers of trading, confirmation and post-trade lifecycle management, EquiLend and Trax are ideally placed to solve for the headaches around unique transaction identifier (UTI) generation, timestamps and lifecycle events. EquiLend and Trax receive new trades and lifecycle events on an intra-day basis, allowing for regulatory reporting monitoring on a near real-time basis.
While firms cannot outsource their reporting obligation, they should look to the expertise of solution providers to help them confidently meet their compliance requirements. EquiLend and Trax combine years of experience and expertise to help ensure that firms have access to a solution built in response to industry feedback to mitigate risks. Industry participants can leverage the community fostered by EquiLend and Trax by taking advantage of the collective mind-share and innovation developed through the interoperable solution, helping firms stay a step ahead of regulatory change.
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