The granular detail
18 September 2018
Seb Malik of Market FinReg discusses what was heard at the SFTR London Conference on 5 September
Image: Shutterstock
On 5 September in Canary Wharf, Market FinReg convened the largest dedicated Securities Financing Transaction Regulation (SFTR) conference held to date. Delegates attended from both end-user firms as well as the full spectrum of solution providers ranging from legal services and training, data vendors, industry bodies, and trade repositories (TRs).
One speaker, who regularly attends and speaks at industry events, said it was “refreshing to see so many new faces, not just the usual crowd”.
The conference might never have happened had we accepted conventional wisdom.
When we floated the idea to convene an international conference dedicated solely on SFTR, we were cautioned with one of the largest SFTR players telling us it wasn’t going to work. We needed to broaden the scope, water down the content, discuss collateral, and slip in a few talks on SFTR here and there in order to secure attendance and sponsors.
But securing sponsors, while desirable, was not our primary objective, because with sponsorships come demands for control over the agenda.
We have made no secret of our concern that for far too long the industry has been beset by generic high-level chatter that fails to address the granular details. I believe this failure to address SFTR head-on is not by coincidence.
SFTR is extremely complex and many firms are grappling to decipher the complicated reporting regime. It’s something of a white elephant in the room. We all know it, but no one is prepared to say it.
SFTR is the most arduous and complex reporting regime to affect the securities financing business. Comprising four tables, six reports, ten action types, trade, position level reporting, and with only certain valid permutations of the sheer level of detail, has left many market participants confused.
Other participants are reluctant to offer opinions lest they be wrong.
We have been privately approached by a number of firms who are leading actors in SFTR, seeking guidance and help in deciphering the complex legislation. In direct response to private requests, Market FinReg convened the International SFTR Conference and billed it “the granular details”. This would be an unconventional conference.
We set about to tackle the reporting regime head-on, no holds barred. Delegates were free to interject with open questions.
Mindful of the advice we had received, we were delighted to see the venue packed to the brim in the morning with delegates flying in from as far as the Czech Republic, Germany, India, Ireland and Norway.
The first takeaway gleaned is that there is a genuine thirst for granular details. The industry is demanding more from participants than generic talks on the importance of legal entity identifiers; establishing operating models; project plans; breaking down silos and not leaving it to the last minute. While all valid observations, such high-level topics are fundamentally deficient in preparing the industry for the reporting regime.
We set out to answer the following questions:
• What is the backdrop to SFTR and what is it trying to achieve?
• What data do I need?
• What are the problematic fields?
• How do I transaction report?
• How often?
• To whom?
• What triggers a reporting obligation? What is not a trigger?
• What does a transaction report look like?
• Which fields do I need to complete?
• Do we report all four tables, 10 action types?
• How do we agree on and generate a unique trade identifier (UTI) in time?
• Can you run through examples of real-life transaction reports?
The conference commenced with an introductory talk in which I highlighted Market FinReg’s advocacy work in the form of taking legal action against European Securities and Markets Authority (ESMA) and separately the European Commission for their failings under EU law, which were harming the industry. Market FinReg approached banks who shared their concerns but were understandably reluctant to commence action against the regulator to whom they are ultimately accountable.
As for ESMA, we took legal action to oblige it to release the field validation rules which resulted in hundreds of vendors and solution providers building out their products months (years?) ahead of time. One appreciative firm noted: “But at least these firms will have more of a head start thanks to [Market FinReg] … whom we can all thank for making these validations publicly available so early in the cycle. We salute Seb Malik for his swashbuckling endeavour to get this document into the public domain.”
After a useful introductory overview by Jonathan Lee of Kaizen Reporting, I presented a series of talks on who is caught by SFTR, extraterritoriality, who should not report, reporting exceptions, report by when and to whom, what are reportable transactions and what are not, and triggers for a report and quizzes to cement knowledge. Subtle details were brought out that may have been missed by the industry such as the view that financial counterparties have to report on behalf of all non-financial counterparties.
Delegates regularly interjected with questions ranging from “what is the definition of employee?”, to a question on how to report collateral and liquidity swaps. Delegates appreciated the time and latitude afforded in being allowed to interrupt to ask ad hoc questions.
There was consensus from both Lee and myself that the EU had gold-plated its Financial Stability Board (FSB) commitments by demanding daily transaction reporting on a trade level. Practitioners interested in detailed background reading were referred to the FSB’s guidelines.
After the mid-morning break, I explained the concept of trade and position level reporting, and the format of the report. Duncan Carpenter from Pirum then took the stage to explain UTI format and generation responsibilities. This led organically into the first panel discussion of the day where I peppered Carpenter and Lee with issues surrounding sharing of UTIs between two counterparties and the greater question of pre-trade matching in order to correctly assign UTIs.
Perhaps the greatest takeaway was the necessity for interoperability between vendor providers in sharing UTIs in the event that two counterparties use different data vendors. Carpenter explained that this was very much an open question with discussions ongoing.
The conclusion of the panel discussion led me back to discuss four tables; six reports; 10 action types and their interplay.
And then came the greatest risk for the day. I projected the Excel Field Validation Specification document onto the screens and began to analyse the issues surrounding each of the 153 fields in turn.
I demonstrated how to use the Excel sheet, how to filter for the relevant fields while reporting and highlighted areas of concern that may arise from a particular validation rule.
One participant remarked that we “were stark raving bonkers” for attempting to pull off something so audacious in a conference that contained CEOs, heads of Trading Desks, and managing directors, but that “it turned out to be an inspired move”.
As the conference was billed as covering the granular details, the field by field was essential. I was anticipating half the delegates to break off during my field by field analysis so was pleasantly surprised when all remained.
The next talk delivered by Jo Hide from Regis-TR was perhaps the most flowing and well-delivered talk of all. Hide commanded the room as she walked delegates through their relationship with a TR, what to ask, expect and demand.
Chad Guissani from Standard Chartered moderated the next panel discussion, probing David Masters of Societe Generale, Matt Smith of SteelEye, Hide, and Lee on data issues and lessons learned from previous reporting regimes.
I then ran through four examples of how to report various reporting scenarios ranging from the simplest bilateral repo, to centrally cleared repos each with counterparty facing off to its own clearing member.
Michael Cyrus, head of collateral trading and FX from Deka Bank and Thomas Hansen head of collateral trading from Credit-Suisse joined me on the panel to discuss collateral, collateral reuse and SFTR, collateral scarcity, settlement and the viability of T+1.
Cyrus expressed a view that the European Commission had exaggerated the level of interconnectedness and systemic risk posed by the shadow banking sector. He stated that the EU tended to approach regulation in the wrong way, deciding on what they intended to do, then rationalising it rather than approaching the issue from principles, then data and then regulation when necessary.
This led to the final talk of the day by Cyrus on the future of regulation and the concept of Smart Regulation. He advanced a powerful argument that there is considerable overlap and redundancy in the various reporting regimes which should be corrected.
Our parting advice to participants are twofold. Firstly, to commence by gaining a thorough understanding of SFTR and its obligations via training of all key personal, and secondly to engage in a robust procurement process when selecting data vendors and TRs.
One speaker, who regularly attends and speaks at industry events, said it was “refreshing to see so many new faces, not just the usual crowd”.
The conference might never have happened had we accepted conventional wisdom.
When we floated the idea to convene an international conference dedicated solely on SFTR, we were cautioned with one of the largest SFTR players telling us it wasn’t going to work. We needed to broaden the scope, water down the content, discuss collateral, and slip in a few talks on SFTR here and there in order to secure attendance and sponsors.
But securing sponsors, while desirable, was not our primary objective, because with sponsorships come demands for control over the agenda.
We have made no secret of our concern that for far too long the industry has been beset by generic high-level chatter that fails to address the granular details. I believe this failure to address SFTR head-on is not by coincidence.
SFTR is extremely complex and many firms are grappling to decipher the complicated reporting regime. It’s something of a white elephant in the room. We all know it, but no one is prepared to say it.
SFTR is the most arduous and complex reporting regime to affect the securities financing business. Comprising four tables, six reports, ten action types, trade, position level reporting, and with only certain valid permutations of the sheer level of detail, has left many market participants confused.
Other participants are reluctant to offer opinions lest they be wrong.
We have been privately approached by a number of firms who are leading actors in SFTR, seeking guidance and help in deciphering the complex legislation. In direct response to private requests, Market FinReg convened the International SFTR Conference and billed it “the granular details”. This would be an unconventional conference.
We set about to tackle the reporting regime head-on, no holds barred. Delegates were free to interject with open questions.
Mindful of the advice we had received, we were delighted to see the venue packed to the brim in the morning with delegates flying in from as far as the Czech Republic, Germany, India, Ireland and Norway.
The first takeaway gleaned is that there is a genuine thirst for granular details. The industry is demanding more from participants than generic talks on the importance of legal entity identifiers; establishing operating models; project plans; breaking down silos and not leaving it to the last minute. While all valid observations, such high-level topics are fundamentally deficient in preparing the industry for the reporting regime.
We set out to answer the following questions:
• What is the backdrop to SFTR and what is it trying to achieve?
• What data do I need?
• What are the problematic fields?
• How do I transaction report?
• How often?
• To whom?
• What triggers a reporting obligation? What is not a trigger?
• What does a transaction report look like?
• Which fields do I need to complete?
• Do we report all four tables, 10 action types?
• How do we agree on and generate a unique trade identifier (UTI) in time?
• Can you run through examples of real-life transaction reports?
The conference commenced with an introductory talk in which I highlighted Market FinReg’s advocacy work in the form of taking legal action against European Securities and Markets Authority (ESMA) and separately the European Commission for their failings under EU law, which were harming the industry. Market FinReg approached banks who shared their concerns but were understandably reluctant to commence action against the regulator to whom they are ultimately accountable.
As for ESMA, we took legal action to oblige it to release the field validation rules which resulted in hundreds of vendors and solution providers building out their products months (years?) ahead of time. One appreciative firm noted: “But at least these firms will have more of a head start thanks to [Market FinReg] … whom we can all thank for making these validations publicly available so early in the cycle. We salute Seb Malik for his swashbuckling endeavour to get this document into the public domain.”
After a useful introductory overview by Jonathan Lee of Kaizen Reporting, I presented a series of talks on who is caught by SFTR, extraterritoriality, who should not report, reporting exceptions, report by when and to whom, what are reportable transactions and what are not, and triggers for a report and quizzes to cement knowledge. Subtle details were brought out that may have been missed by the industry such as the view that financial counterparties have to report on behalf of all non-financial counterparties.
Delegates regularly interjected with questions ranging from “what is the definition of employee?”, to a question on how to report collateral and liquidity swaps. Delegates appreciated the time and latitude afforded in being allowed to interrupt to ask ad hoc questions.
There was consensus from both Lee and myself that the EU had gold-plated its Financial Stability Board (FSB) commitments by demanding daily transaction reporting on a trade level. Practitioners interested in detailed background reading were referred to the FSB’s guidelines.
After the mid-morning break, I explained the concept of trade and position level reporting, and the format of the report. Duncan Carpenter from Pirum then took the stage to explain UTI format and generation responsibilities. This led organically into the first panel discussion of the day where I peppered Carpenter and Lee with issues surrounding sharing of UTIs between two counterparties and the greater question of pre-trade matching in order to correctly assign UTIs.
Perhaps the greatest takeaway was the necessity for interoperability between vendor providers in sharing UTIs in the event that two counterparties use different data vendors. Carpenter explained that this was very much an open question with discussions ongoing.
The conclusion of the panel discussion led me back to discuss four tables; six reports; 10 action types and their interplay.
And then came the greatest risk for the day. I projected the Excel Field Validation Specification document onto the screens and began to analyse the issues surrounding each of the 153 fields in turn.
I demonstrated how to use the Excel sheet, how to filter for the relevant fields while reporting and highlighted areas of concern that may arise from a particular validation rule.
One participant remarked that we “were stark raving bonkers” for attempting to pull off something so audacious in a conference that contained CEOs, heads of Trading Desks, and managing directors, but that “it turned out to be an inspired move”.
As the conference was billed as covering the granular details, the field by field was essential. I was anticipating half the delegates to break off during my field by field analysis so was pleasantly surprised when all remained.
The next talk delivered by Jo Hide from Regis-TR was perhaps the most flowing and well-delivered talk of all. Hide commanded the room as she walked delegates through their relationship with a TR, what to ask, expect and demand.
Chad Guissani from Standard Chartered moderated the next panel discussion, probing David Masters of Societe Generale, Matt Smith of SteelEye, Hide, and Lee on data issues and lessons learned from previous reporting regimes.
I then ran through four examples of how to report various reporting scenarios ranging from the simplest bilateral repo, to centrally cleared repos each with counterparty facing off to its own clearing member.
Michael Cyrus, head of collateral trading and FX from Deka Bank and Thomas Hansen head of collateral trading from Credit-Suisse joined me on the panel to discuss collateral, collateral reuse and SFTR, collateral scarcity, settlement and the viability of T+1.
Cyrus expressed a view that the European Commission had exaggerated the level of interconnectedness and systemic risk posed by the shadow banking sector. He stated that the EU tended to approach regulation in the wrong way, deciding on what they intended to do, then rationalising it rather than approaching the issue from principles, then data and then regulation when necessary.
This led to the final talk of the day by Cyrus on the future of regulation and the concept of Smart Regulation. He advanced a powerful argument that there is considerable overlap and redundancy in the various reporting regimes which should be corrected.
Our parting advice to participants are twofold. Firstly, to commence by gaining a thorough understanding of SFTR and its obligations via training of all key personal, and secondly to engage in a robust procurement process when selecting data vendors and TRs.
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