SFTR: less than a year to go
27 June 2019
How can firms become compliant with SFTR ahead of its implementation date, which is just under a year away. Fabien Romero of IHS Markit and Simon Davies of Pirum explain
Image: Shutterstock
With Securities Financing Transactions Regulation (SFTR) due to go live in its first phase on 13 April 2020 there is now under one year for many firms to be compliant.
Following the ratification of the SFTR regulatory technical standards (RTS) by the EU parliament on 22 March 2019, the European Securities and Markets Authority (ESMA) has published its much awaited consultation on proposed level three guidance. Firms now have until 29 July 2019 to submit contributions under the consultation timeline, then there will be a period where the finalised guidance notes will be used to clarify some of the outstanding points the industry is waiting for.
Since the regulation was ratified, Pirum and our SFTR partners, IHS Markit, have seen an increase in activity from firms preparing for SFTR compliance, as well as new clients signing up for our regulatory reporting services. Furthermore, existing clients are ramping up their efforts, particularly around how they are going to adapt their operating model in order to maximise the pairing and matching rates at go-live.
Is the industry ready?
No, not yet! I don’t think anyone would be surprised by that.
Firstly, firms are working though some complicated issues at an industry level, adopting the emerging industry best practices, along with dealing with these changes at a reporting level, firms are having to adapt how they process transactions and the resulting life-cycle events.
Secondly, we need to wait until the level 3 regulatory guidance has been completed. Specifically, market participants are looking for further clarity on how to report a number of scenarios. Following this period of consultancy we are likely to see guidelines published in Q4 2019.
Thirdly, there is no requirement to report yet, and there are no authorised trade repositories (TRs) yet to send reports to. Rightly, the industry is taking full advantage of the timeline afforded to them by the regulators to prepare for the go-live date.
Importantly, we’ve seen firms engage across their business units and regulatory reporting teams to work on their solution designs and through our design partnership group (DPG) we’ve seen an impressive level of engagement to deal with the challenges the regulation creates. The industry has learnt from issues in the past, and whilst firms are not fully compliant, we’ve seen an increase in their activity in preparing for the regulation since the ratification of the RTS took place.
The consultation period seeks to deal with some of the outstanding issues the industry is waiting for clarification on, however it has thrown out a few further questions. At the same time some of the more significant topics covered include:
• Backloading: how to approach the backloading requirement at reporting start date, including a discussion on the pros and cons of reporting all open trades on day one
• Reverse stock borrow loan: should ‘cash-driven’ securities loans be reported using the repo reporting template
• Effective date: should modifications be reported once they ‘have taken place’ as opposed to when they are initially agreed?
• Collateral re-use and reinvestment: where a non-financial counterparty (NFC) receives mandatory delegated reporting from more than one financial counterparty (FC) should each FC submit a separate reuse/reinvestment report on behalf of the NFC. Does the same apply to voluntary delegation?
• Non-financial counterparties: should an EU domiciled NFC fulfil their own reporting if the FC is non-EU domiciled
Running at 178 pages and 85 questions, there is a lot to consider, and while the paper gives an indication on how ESMA are thinking about dealing with some of the issues that the industry faces, there could be changes once the final guidance notes are published. Although that gives very little time to deal with those changes when it comes to meeting the initial phase one go-live date.
There is no time for complacency given some of the reporting complexities. There is a need for both data and process remediation prior to go-live along with the introduction of new industry practices (particularly around agency lending disclosure (ALD) and collateral reporting treatments). A lot of work needs to be completed before firms are ready to start reporting.
Are you ready?
For those firms still in their solution design and vendor selection phases, now that the EU parliament has ratified the RTS, there is no time to waste in galvanising focus and ensuring there is necessary support internally to start or accelerate your project. You should also consider what data and process remediation is required. As part of our SFTR design partnership group (DPG) we have taken the time and effort to listen to what our clients need and working out how we can support them in their reporting solution. Around 830 hours have been spent by the DPG reviewing requirements and discussing how best to achieve these—along with the many hours invested by the industry bodies in defining best practices. Naturally, this has taken time, as firms grapple with the requirements and gain a broader, more detailed understanding of what they need. This hasn’t delayed anything and has added enormous value to both our delivery programme and our clients. Between Pirum and IHS Markit, we’ve dedicated over 30 resources to our joint programme over the last two years and we’re now in the late phases of our project. Most importantly, we remain on track and continue to progress well including client integration and testing.
What this means in practice is that we have firms on-boarding and integrating file feeds to our service well ahead of the go-live date for reporting, and ahead of our pre-production testing planned to start in Q3 of this year.
We actively share and review our progress and pipeline with the DPG and our clients, as part of our ongoing communication with the market. We now have 48 firms committed to using our solution representing the broad range of securities finance market participants. Within this group we have agent and principal lenders, prime brokers, broker dealers, asset managers and funds all represented. In terms of product representation this group covers securities lending, commodities lending, repo, buy-sell back and margin lending, so we’ve been able to design our solution for every combination of participant and product.
Helping you to be ready
With such demanding requirements, how can IHS Markit and Pirum help firms to be compliant with their SFTR reporting?
Firms can leverage their existing experience and connectivity to both IHS Markit and Pirum in the Securities Finance and regulatory reporting spaces, alleviating some of the effort required for SFTR compliance.
IHS Markit already has internationally recognised expertise in data management and provides trade reporting services for the reporting regimes of the following regulators: Australian Securities and Investments Commission (ASIC), Hong Kong Monetary Authority (HKMA), Japan Financial Services Agency (JFSA), Monetary Authority of Singapore (MAS), OTC Derivatives Regulators Forum (ODRF), US Commodity Futures Trading Commission (CFTC) and in the EU under European Market Infrastructure Regulation (EMIR).
Additionally, clients can take advantage of Pirum’s decades long expertise in securities finance lifecycle management and automation, delivered through its award-winning contract compare solution, helping address many of the challenges of the SFTR dual sided reporting and unique transaction identifier (UTI) generation and dissemination.
The result of this interoperable and seamless combination delivered by two of the Securities Finance market leaders, is a reporting solution for Securities Financing Transactions Regulations (SFTR) that sets an industry wide standard. Providing the foundation needed to reconcile trading and collateral activity down to the necessary UTI and legal entity identifier level of granularity. The SFTR solution offers participants turnkey connectivity to trade repositories, the reports produced by the TR with associated trade status. This modular, fully hosted, solution leverages our proven track record of delivering industry wide reporting solutions and our years of partnership with the securities lending community.
The service is composed of the following modules, providing an end to end solution for all in scope SFTs:
• Data exchange: leveraging IHS Markit and Pirum’s extensive connectivity to collect all the underlying information required for SFTR reporting
• Data warehouse: full history and audit trail of all received transactions retained for more than seven years and data enrichment using centralised reference data
• Data reconciliation: reconciliation of all transactions to the SFTR required standard with UTI generation and management
• Reporting: creation of ISO 20022 reporting messages and management of all reports to a TR of the client’s choice
• Delegated reporting: management of delegated reporting including access for underlying clients to view and affirm the reports made on their behalf
Key benefits:
• Built-in infrastructure and relationships: tap into the existing relationships that IHS Markit and Pirum have built across the securities finance industry. Our network of data contributors, built over the last 20 years, represents $15 trillion of inventory held by over 120,000 underlying funds. We process and match over 3 million transactions daily using a reporting specification that already covers the majority of fields required by the latest draft of the SFTR legislation.
• Flexibility: use the solution’s modular nature to meet your individual needs and structure. Flexibility starts with the data ingest architecture all the way down to trade reporting as the solution will be connected to every TR.
• Future-proof compliance: get a solution that has the flexibility to deliver transaction reporting across future legislation, which might require transaction reporting in other jurisdictions, as well as any additional transparency/risk reporting framework that could be mandated across the securities finance industry.
Following the ratification of the SFTR regulatory technical standards (RTS) by the EU parliament on 22 March 2019, the European Securities and Markets Authority (ESMA) has published its much awaited consultation on proposed level three guidance. Firms now have until 29 July 2019 to submit contributions under the consultation timeline, then there will be a period where the finalised guidance notes will be used to clarify some of the outstanding points the industry is waiting for.
Since the regulation was ratified, Pirum and our SFTR partners, IHS Markit, have seen an increase in activity from firms preparing for SFTR compliance, as well as new clients signing up for our regulatory reporting services. Furthermore, existing clients are ramping up their efforts, particularly around how they are going to adapt their operating model in order to maximise the pairing and matching rates at go-live.
Is the industry ready?
No, not yet! I don’t think anyone would be surprised by that.
Firstly, firms are working though some complicated issues at an industry level, adopting the emerging industry best practices, along with dealing with these changes at a reporting level, firms are having to adapt how they process transactions and the resulting life-cycle events.
Secondly, we need to wait until the level 3 regulatory guidance has been completed. Specifically, market participants are looking for further clarity on how to report a number of scenarios. Following this period of consultancy we are likely to see guidelines published in Q4 2019.
Thirdly, there is no requirement to report yet, and there are no authorised trade repositories (TRs) yet to send reports to. Rightly, the industry is taking full advantage of the timeline afforded to them by the regulators to prepare for the go-live date.
Importantly, we’ve seen firms engage across their business units and regulatory reporting teams to work on their solution designs and through our design partnership group (DPG) we’ve seen an impressive level of engagement to deal with the challenges the regulation creates. The industry has learnt from issues in the past, and whilst firms are not fully compliant, we’ve seen an increase in their activity in preparing for the regulation since the ratification of the RTS took place.
The consultation period seeks to deal with some of the outstanding issues the industry is waiting for clarification on, however it has thrown out a few further questions. At the same time some of the more significant topics covered include:
• Backloading: how to approach the backloading requirement at reporting start date, including a discussion on the pros and cons of reporting all open trades on day one
• Reverse stock borrow loan: should ‘cash-driven’ securities loans be reported using the repo reporting template
• Effective date: should modifications be reported once they ‘have taken place’ as opposed to when they are initially agreed?
• Collateral re-use and reinvestment: where a non-financial counterparty (NFC) receives mandatory delegated reporting from more than one financial counterparty (FC) should each FC submit a separate reuse/reinvestment report on behalf of the NFC. Does the same apply to voluntary delegation?
• Non-financial counterparties: should an EU domiciled NFC fulfil their own reporting if the FC is non-EU domiciled
Running at 178 pages and 85 questions, there is a lot to consider, and while the paper gives an indication on how ESMA are thinking about dealing with some of the issues that the industry faces, there could be changes once the final guidance notes are published. Although that gives very little time to deal with those changes when it comes to meeting the initial phase one go-live date.
There is no time for complacency given some of the reporting complexities. There is a need for both data and process remediation prior to go-live along with the introduction of new industry practices (particularly around agency lending disclosure (ALD) and collateral reporting treatments). A lot of work needs to be completed before firms are ready to start reporting.
Are you ready?
For those firms still in their solution design and vendor selection phases, now that the EU parliament has ratified the RTS, there is no time to waste in galvanising focus and ensuring there is necessary support internally to start or accelerate your project. You should also consider what data and process remediation is required. As part of our SFTR design partnership group (DPG) we have taken the time and effort to listen to what our clients need and working out how we can support them in their reporting solution. Around 830 hours have been spent by the DPG reviewing requirements and discussing how best to achieve these—along with the many hours invested by the industry bodies in defining best practices. Naturally, this has taken time, as firms grapple with the requirements and gain a broader, more detailed understanding of what they need. This hasn’t delayed anything and has added enormous value to both our delivery programme and our clients. Between Pirum and IHS Markit, we’ve dedicated over 30 resources to our joint programme over the last two years and we’re now in the late phases of our project. Most importantly, we remain on track and continue to progress well including client integration and testing.
What this means in practice is that we have firms on-boarding and integrating file feeds to our service well ahead of the go-live date for reporting, and ahead of our pre-production testing planned to start in Q3 of this year.
We actively share and review our progress and pipeline with the DPG and our clients, as part of our ongoing communication with the market. We now have 48 firms committed to using our solution representing the broad range of securities finance market participants. Within this group we have agent and principal lenders, prime brokers, broker dealers, asset managers and funds all represented. In terms of product representation this group covers securities lending, commodities lending, repo, buy-sell back and margin lending, so we’ve been able to design our solution for every combination of participant and product.
Helping you to be ready
With such demanding requirements, how can IHS Markit and Pirum help firms to be compliant with their SFTR reporting?
Firms can leverage their existing experience and connectivity to both IHS Markit and Pirum in the Securities Finance and regulatory reporting spaces, alleviating some of the effort required for SFTR compliance.
IHS Markit already has internationally recognised expertise in data management and provides trade reporting services for the reporting regimes of the following regulators: Australian Securities and Investments Commission (ASIC), Hong Kong Monetary Authority (HKMA), Japan Financial Services Agency (JFSA), Monetary Authority of Singapore (MAS), OTC Derivatives Regulators Forum (ODRF), US Commodity Futures Trading Commission (CFTC) and in the EU under European Market Infrastructure Regulation (EMIR).
Additionally, clients can take advantage of Pirum’s decades long expertise in securities finance lifecycle management and automation, delivered through its award-winning contract compare solution, helping address many of the challenges of the SFTR dual sided reporting and unique transaction identifier (UTI) generation and dissemination.
The result of this interoperable and seamless combination delivered by two of the Securities Finance market leaders, is a reporting solution for Securities Financing Transactions Regulations (SFTR) that sets an industry wide standard. Providing the foundation needed to reconcile trading and collateral activity down to the necessary UTI and legal entity identifier level of granularity. The SFTR solution offers participants turnkey connectivity to trade repositories, the reports produced by the TR with associated trade status. This modular, fully hosted, solution leverages our proven track record of delivering industry wide reporting solutions and our years of partnership with the securities lending community.
The service is composed of the following modules, providing an end to end solution for all in scope SFTs:
• Data exchange: leveraging IHS Markit and Pirum’s extensive connectivity to collect all the underlying information required for SFTR reporting
• Data warehouse: full history and audit trail of all received transactions retained for more than seven years and data enrichment using centralised reference data
• Data reconciliation: reconciliation of all transactions to the SFTR required standard with UTI generation and management
• Reporting: creation of ISO 20022 reporting messages and management of all reports to a TR of the client’s choice
• Delegated reporting: management of delegated reporting including access for underlying clients to view and affirm the reports made on their behalf
Key benefits:
• Built-in infrastructure and relationships: tap into the existing relationships that IHS Markit and Pirum have built across the securities finance industry. Our network of data contributors, built over the last 20 years, represents $15 trillion of inventory held by over 120,000 underlying funds. We process and match over 3 million transactions daily using a reporting specification that already covers the majority of fields required by the latest draft of the SFTR legislation.
• Flexibility: use the solution’s modular nature to meet your individual needs and structure. Flexibility starts with the data ingest architecture all the way down to trade reporting as the solution will be connected to every TR.
• Future-proof compliance: get a solution that has the flexibility to deliver transaction reporting across future legislation, which might require transaction reporting in other jurisdictions, as well as any additional transparency/risk reporting framework that could be mandated across the securities finance industry.
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