Uniformity may be the new differentiator
18 July 2019
David Lewis of FIS suggests that if the market can move effectively in the right direction, the industry will realise it loves SFTR
Image: Shutterstock
While this may sound like a version of “doublespeak” from some new dystopian world, there is, like in the book, 1984, some basis in the suggestion that the observations in this article will only tell you what you already know.
One of the positive spinoffs, as described by Andy Dyson, ISLA CEO, from the efforts being applied to analysing and implementing the Securities Finance Transaction Regulation (SFTR), is that the industry is being forced to shine a light on areas that have hitherto lacked the kind of attention that they have perhaps deserved.
In order to meet the stringent and complex demands of SFTR, market participant organisations and their providers are expending significant resources on data and processes. This includes not only adding and maintaining data items that they have not needed to consider before, such as legal entity identifier (LEIs) but potentially revamping their entire booking and position management process from start to finish. The ultimate aim, of course, is to be able to satisfy their regulators that they not only have a good grip of exactly what their positions and obligations are, but they can also efficiently and accurately report them within the quality and time constraints laid down in the regulation.
Both the dynamics of quality and time (to delivery) will weigh heavily on those reporting to their regulator, via their chosen trade repository. The time aspect can be altered through process and system/technology enhancements, but the key to quality is a different animal altogether. While pre-matching is not a direct requirement of the regulation, the matching rates arising from the data reported to the market trade repositories will become the benchmarks by which quality could well be measured. Early bilateral testing of data between some the International Capital Market Association (ICMA) members highlighted just how difficult a task this was going to be, showing that the somewhat fundamental data items of trades, including the security traded, the volume of that security and the rate charged, seemed to be causing most of the comparison mismatches. The fact that such mismatch issues could translate not into embarrassment and red faces but to real and potentially substantial fines has brought the need to prepare for SFTR properly into sharp focus.
At the recent Securities Lending Times Technology Symposium, some of the discussions revolved around the need to get the basics right in our market, and rarely has a more accurate statement been made when considering the requirements of SFTR. As an industry, we have an unusually varied approach to undertaking the activities of the securities finance and collateral business and it is those differences that may well cause the greatest issues. While tokenisation and distributed ledgers may be exciting buzz words and attractive bandwagons to jump aboard, the common data model (CDM) sounds positively pedestrian, even tedious. If the industry can get past that, and move toward not only a CDM but a more unified model of trading and position keeping, then the foundations for the more exciting developments will be all the more solid.
Few would advocate that all market participants should suddenly become carbon copies of each other, but the way that our business is undertaken could certainly benefit from more standardisation. This would be one logical response to the challenges of SFTR and other regulations where faster, more accurate data exchanges will be key to market success. One other, and certainly potentially as important, response could be increased mutualisation. At FIS, we have witnessed the benefits to our clients of bringing a utility approach to the post-trade management of derivatives, for example, and the success of this kind of mutualisation should not pass the securities finance industry by. The advent of SFTR has certainly brought about an unprecedented sense of collaboration right across the market. Witness the various vendor and market participant groups showing members working diligently together toward resolving the industry-wide challenge that is SFTR; yes, even the vendors, FIS included, are behaving kindly to each other in the common aim of bringing this project to a successful conclusion.
In real terms, the output of these efforts is likely to be more commonality in booking and processing methods, greater automation and higher rates of straight-through processing, coupled with solid regulatory reporting compliance. The work required to bring these often-disparate approaches to the market together into a single, unified set of reportable data is no small task, and that task could conflict with the desire of each market participant to retain their methods of working and managing their businesses. It is these individual approaches to working that can often deliver the competitive edge or differentiator that protects each organisation’s market position. With that in mind, the key will be to concentrate on the areas of commonality that make sense, without degrading the identity and advantages each participant has built up over many years.
Whatever route the industry takes to get there by next April, it is the standardised reporting outputs that the regulator will be looking at, as processed and delivered by the authorised trade repositories who operate under strict and well-practised record acceptability criteria. In that respect, it makes good sense for market participants to work toward common output testing regimes, as being promoted by one prominent market consultant. As the vendors work together, with each other and their clients, to try and reach processing and output standards, we will be working toward a common data model in terms of output. The only way to achieve that effectively is, of course, to get the inputs and data storage to also conform to new standards of commonality.
If the market can move effectively and swiftly in that direction, under the banner of regulatory conformity or otherwise, then the uniformity of data, trade booking, recording and management will bring operational efficiencies and a direct positive impact to the bottom line of all those that achieve it. Only then, just like Winston did in 1984, will we wake up from the nightmare of conforming to the authority of the regulator and realise that we love SFTR.
One of the positive spinoffs, as described by Andy Dyson, ISLA CEO, from the efforts being applied to analysing and implementing the Securities Finance Transaction Regulation (SFTR), is that the industry is being forced to shine a light on areas that have hitherto lacked the kind of attention that they have perhaps deserved.
In order to meet the stringent and complex demands of SFTR, market participant organisations and their providers are expending significant resources on data and processes. This includes not only adding and maintaining data items that they have not needed to consider before, such as legal entity identifier (LEIs) but potentially revamping their entire booking and position management process from start to finish. The ultimate aim, of course, is to be able to satisfy their regulators that they not only have a good grip of exactly what their positions and obligations are, but they can also efficiently and accurately report them within the quality and time constraints laid down in the regulation.
Both the dynamics of quality and time (to delivery) will weigh heavily on those reporting to their regulator, via their chosen trade repository. The time aspect can be altered through process and system/technology enhancements, but the key to quality is a different animal altogether. While pre-matching is not a direct requirement of the regulation, the matching rates arising from the data reported to the market trade repositories will become the benchmarks by which quality could well be measured. Early bilateral testing of data between some the International Capital Market Association (ICMA) members highlighted just how difficult a task this was going to be, showing that the somewhat fundamental data items of trades, including the security traded, the volume of that security and the rate charged, seemed to be causing most of the comparison mismatches. The fact that such mismatch issues could translate not into embarrassment and red faces but to real and potentially substantial fines has brought the need to prepare for SFTR properly into sharp focus.
At the recent Securities Lending Times Technology Symposium, some of the discussions revolved around the need to get the basics right in our market, and rarely has a more accurate statement been made when considering the requirements of SFTR. As an industry, we have an unusually varied approach to undertaking the activities of the securities finance and collateral business and it is those differences that may well cause the greatest issues. While tokenisation and distributed ledgers may be exciting buzz words and attractive bandwagons to jump aboard, the common data model (CDM) sounds positively pedestrian, even tedious. If the industry can get past that, and move toward not only a CDM but a more unified model of trading and position keeping, then the foundations for the more exciting developments will be all the more solid.
Few would advocate that all market participants should suddenly become carbon copies of each other, but the way that our business is undertaken could certainly benefit from more standardisation. This would be one logical response to the challenges of SFTR and other regulations where faster, more accurate data exchanges will be key to market success. One other, and certainly potentially as important, response could be increased mutualisation. At FIS, we have witnessed the benefits to our clients of bringing a utility approach to the post-trade management of derivatives, for example, and the success of this kind of mutualisation should not pass the securities finance industry by. The advent of SFTR has certainly brought about an unprecedented sense of collaboration right across the market. Witness the various vendor and market participant groups showing members working diligently together toward resolving the industry-wide challenge that is SFTR; yes, even the vendors, FIS included, are behaving kindly to each other in the common aim of bringing this project to a successful conclusion.
In real terms, the output of these efforts is likely to be more commonality in booking and processing methods, greater automation and higher rates of straight-through processing, coupled with solid regulatory reporting compliance. The work required to bring these often-disparate approaches to the market together into a single, unified set of reportable data is no small task, and that task could conflict with the desire of each market participant to retain their methods of working and managing their businesses. It is these individual approaches to working that can often deliver the competitive edge or differentiator that protects each organisation’s market position. With that in mind, the key will be to concentrate on the areas of commonality that make sense, without degrading the identity and advantages each participant has built up over many years.
Whatever route the industry takes to get there by next April, it is the standardised reporting outputs that the regulator will be looking at, as processed and delivered by the authorised trade repositories who operate under strict and well-practised record acceptability criteria. In that respect, it makes good sense for market participants to work toward common output testing regimes, as being promoted by one prominent market consultant. As the vendors work together, with each other and their clients, to try and reach processing and output standards, we will be working toward a common data model in terms of output. The only way to achieve that effectively is, of course, to get the inputs and data storage to also conform to new standards of commonality.
If the market can move effectively and swiftly in that direction, under the banner of regulatory conformity or otherwise, then the uniformity of data, trade booking, recording and management will bring operational efficiencies and a direct positive impact to the bottom line of all those that achieve it. Only then, just like Winston did in 1984, will we wake up from the nightmare of conforming to the authority of the regulator and realise that we love SFTR.
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