Where are we now?
04 Febuary 2020
European trade repository REGIS-TR is part of Deutsche Boerse Group and the TR of choice for group companies Clearstream and Eurex. With only weeks to go until SFTR, Nick Bruce takes a look at the final countdown
Image: Shutterstock
Finally, we have the last missing chunks of the Securities Financing Transactions Regulation (SFTR): the ISO 20022 schemas, the updated reporting guidelines and the amended validation rules. At the very least – and as the industry gets to grips with this and other regulations, it may well be that they need the odd fix – they are not going to change right now; everyone can be pretty certain what they’re dealing with. That said, first-wave firms heading towards 13 April have been given only 14 weeks to analyse 300-odd pages of guidelines, define the changes, assess their impact, implement them in their systems and complete extensive testing. Hardly relaxing.
At the time of writing, it is only a few days since SFTR’s final guidelines were released on 6 January and, like most of the industry, we are combing through the fine detail. The main question, of course, is – after years of guidelines,evaluations, debates and updates – how well is this all going to work?
In June last year, Neil Davies, Clearstream product guru and a long-time member of SFTR industry working groups for the International Capital Market Association (ICMA) and the International Securities Lending Association (ISLA), highlighted 10 of the more obscure potential issues (see this magazine’s 2019-20 SFTR Annual for a recap).
Some of these remain ongoing (still no sign of a quick, efficient and inexpensive unique trade identifier (UTI) sharer gaining market traction, for example), and others – dealing with XML, doing your own reuse data reporting, possible counterparty issues with coordinated universal time (UTC) – are mainly, to be fair, down to awareness and planning. Others, such as the issue of data sharing with non-EU agent lenders, may simply be things that no-one can do much about.
In its 6 January statement on legal entity Identifiers (LEI), the European Securities and Markets Authority (ESMA) suspended the LEI requirement for third-country (non-EU) securities issuers until April 2021. This put a more-than-welcome hold on a problem which, if left unaddressed, would have left up to 70 percent of third-country securities unusable as soon as SFTR kicked in, with a massive impact on their liquidity.
However, there remains the conundrum of the 12 percent or so of instruments with issuers in the EU that don’t have LEIs. As of 13 April, in terms of SFTR reporting, these securities will be ineligible. Do firms simply not trade in them? Might national competent authorities stretch a point on under-reporting for a while? There could be 100 international securities identification numbers (ISINs) in a single collateral report, but if just one of those had no LEI, the report would be rejected. There is no practical and viable solution to this one. Watch out for this in your backloading list, too.
Speaking of backloading, this has also been a bit up-and-down. The initial 180-190-day requirement had its downsides, as did a subsequent industry proposal to simply upload all outstanding transactions on the first reporting date. The updated guidelines say that so long as the 190-day deadline is met, reporting firms can make their own decisions about backloading dates. Sounds good, but what if you have already programmed your systems for 180-day backloading but your counterparties plan to frontload on, say, day one? Interestingly, the guidelines say: “In case both counterparties are covered by the relevant reporting start date, to minimise reconciliation breaks, they should agree on which day they backload the SFTs”. It’s not clear if this is a) helpful advice or b) a firm instruction to report on the same day, in which case it’ll be a heavy load for firms that had been counting on another few months to deal with the backloading issue.
Probably inevitably now that the regulation is nailed down, the odd blip is coming up in the ISO messages. One is in the auth.031 status advice, the trade repository’s (TR) feedback on each file of transaction reports. The auth.031 goes to the entity that submitted the file and also to the counterparty and responsible entity, assuming they a) exist and b) have an account with the same repository. As things stand, if the feedback contains, say, rejections, only the submitting entity, which has the original report, can see which SFTs are affected, and why. Until this issue is resolved, the other two parties will be aware of the problem, but have no details to work from.
Another small thing that may need firms’ attention is how the fields in the regulation are reflected in the schemas. Take 2.83, collateral quantity or nominal amount. One field, you might think. But in the schemas, there are two: quantity for equities and nominal for bonds. Now, for net exposure reporting, the new guidelines say that the collateral giver reports the quantity or nominal amount as a negative number. For quantity, this is straightforward; you put a minus sign before the number. However, you can’t use a minus sign for the nominal amount; instead, you enter the number of bonds and populate the ISO element with ‘true’. It’s doable, but fidgety. Also bear in mind that this is a reconcilable field and the two legs need to show the same number: one positive and one not.
Far more cheerfully, SFTR has done a great deal for cooperation across the industry. Much of this comes down to the various expert groups, notably ICMA’s SFTR task force (collateral and repo), ISLA’s SteerCo (securities lending and borrowing) and the ISO evaluation team (SWIFT standards). These forums have brought together reporting firms, infrastructure providers, vendors, regulators - especially ESMA - and TRs to interpret the regulations, define issues, provide solutions and define best practice and guidance. Separately, the trade repositories have formed an inter-TR group to ensure maximum coordination, with a strong focus on reconciliation and the processes for switching to another TR.
REGIS-TR has been very much part of this co-operative effort throughout the development of SFTR, providing feedback to ESMA on standards and policy and as members of the inter-TR group, industry expert forums and wider industry groups such as the Association of the Luxembourg Fund Industry. Our vice-president Tomas Bremin was convenor of the ISO evaluation team, which worked with ESMA to define a set of standard, registered ISO 20022 messages for each SFT data-related reporting communication. This is a huge step and the use of these messages will not only hugely improve the quality and consistency of the data, particularly where reconciliation is concerned, but also create a much more level playing field in TR terms, with firms able to select or change repositories on the basis of price and performance and without the hassle and expense of adapting to different proprietary formats.
REGIS-TR was the first TR to provide a client testing environment for basic XML schema validation. Our current user acceptance testing (UAT), based on the most recent (20 December) ISO 20022 schemas, is up and running and in use both by our clients and by other firms looking to test our SFTR and other solutions. We are adding to this UAT environment gradually and are aiming for full SFTR UAT reporting functionality in February.
We are also providing various tools to assist clients with the new reporting regime, including a clear and comprehensive handbook, early onboarding and access to governing documents, various training modules offered by Market FinReg, which can be held on client sites, and a planned UAT demo video in English, French, German or Spanish.
SFTR is a specialised, complex niche, and all firms should report to a TR that can provide both expert market knowledge and swift, responsive service support. We stay very close to our clients to help them through the entire lifecycle of regulatory reporting and, while we cannot provide legal or regulatory guidance, if you have an exception management problem, or a technical issue, we will find you the right person to provide technical advice.
Our support network, which is free of charge to our clients, offers fluency in all the main European languages in addition to several others. We have a proactive client services team with profound expertise in technical systems and reporting regulation, with a response time averaging three hours. We work with our clients if an issue proves complex, constantly stress-test our systems and contact a client directly if our monitoring tools detect an unexpected change in reporting patterns. Our relationship managers, who can be contacted directly for assistance with all aspects of our regulatory services, also hold regular user groups throughout Europe to discuss current issues and regulatory developments.
At the time of writing, it is only a few days since SFTR’s final guidelines were released on 6 January and, like most of the industry, we are combing through the fine detail. The main question, of course, is – after years of guidelines,evaluations, debates and updates – how well is this all going to work?
In June last year, Neil Davies, Clearstream product guru and a long-time member of SFTR industry working groups for the International Capital Market Association (ICMA) and the International Securities Lending Association (ISLA), highlighted 10 of the more obscure potential issues (see this magazine’s 2019-20 SFTR Annual for a recap).
Some of these remain ongoing (still no sign of a quick, efficient and inexpensive unique trade identifier (UTI) sharer gaining market traction, for example), and others – dealing with XML, doing your own reuse data reporting, possible counterparty issues with coordinated universal time (UTC) – are mainly, to be fair, down to awareness and planning. Others, such as the issue of data sharing with non-EU agent lenders, may simply be things that no-one can do much about.
In its 6 January statement on legal entity Identifiers (LEI), the European Securities and Markets Authority (ESMA) suspended the LEI requirement for third-country (non-EU) securities issuers until April 2021. This put a more-than-welcome hold on a problem which, if left unaddressed, would have left up to 70 percent of third-country securities unusable as soon as SFTR kicked in, with a massive impact on their liquidity.
However, there remains the conundrum of the 12 percent or so of instruments with issuers in the EU that don’t have LEIs. As of 13 April, in terms of SFTR reporting, these securities will be ineligible. Do firms simply not trade in them? Might national competent authorities stretch a point on under-reporting for a while? There could be 100 international securities identification numbers (ISINs) in a single collateral report, but if just one of those had no LEI, the report would be rejected. There is no practical and viable solution to this one. Watch out for this in your backloading list, too.
Speaking of backloading, this has also been a bit up-and-down. The initial 180-190-day requirement had its downsides, as did a subsequent industry proposal to simply upload all outstanding transactions on the first reporting date. The updated guidelines say that so long as the 190-day deadline is met, reporting firms can make their own decisions about backloading dates. Sounds good, but what if you have already programmed your systems for 180-day backloading but your counterparties plan to frontload on, say, day one? Interestingly, the guidelines say: “In case both counterparties are covered by the relevant reporting start date, to minimise reconciliation breaks, they should agree on which day they backload the SFTs”. It’s not clear if this is a) helpful advice or b) a firm instruction to report on the same day, in which case it’ll be a heavy load for firms that had been counting on another few months to deal with the backloading issue.
Probably inevitably now that the regulation is nailed down, the odd blip is coming up in the ISO messages. One is in the auth.031 status advice, the trade repository’s (TR) feedback on each file of transaction reports. The auth.031 goes to the entity that submitted the file and also to the counterparty and responsible entity, assuming they a) exist and b) have an account with the same repository. As things stand, if the feedback contains, say, rejections, only the submitting entity, which has the original report, can see which SFTs are affected, and why. Until this issue is resolved, the other two parties will be aware of the problem, but have no details to work from.
Another small thing that may need firms’ attention is how the fields in the regulation are reflected in the schemas. Take 2.83, collateral quantity or nominal amount. One field, you might think. But in the schemas, there are two: quantity for equities and nominal for bonds. Now, for net exposure reporting, the new guidelines say that the collateral giver reports the quantity or nominal amount as a negative number. For quantity, this is straightforward; you put a minus sign before the number. However, you can’t use a minus sign for the nominal amount; instead, you enter the number of bonds and populate the ISO element with ‘true’. It’s doable, but fidgety. Also bear in mind that this is a reconcilable field and the two legs need to show the same number: one positive and one not.
Far more cheerfully, SFTR has done a great deal for cooperation across the industry. Much of this comes down to the various expert groups, notably ICMA’s SFTR task force (collateral and repo), ISLA’s SteerCo (securities lending and borrowing) and the ISO evaluation team (SWIFT standards). These forums have brought together reporting firms, infrastructure providers, vendors, regulators - especially ESMA - and TRs to interpret the regulations, define issues, provide solutions and define best practice and guidance. Separately, the trade repositories have formed an inter-TR group to ensure maximum coordination, with a strong focus on reconciliation and the processes for switching to another TR.
REGIS-TR has been very much part of this co-operative effort throughout the development of SFTR, providing feedback to ESMA on standards and policy and as members of the inter-TR group, industry expert forums and wider industry groups such as the Association of the Luxembourg Fund Industry. Our vice-president Tomas Bremin was convenor of the ISO evaluation team, which worked with ESMA to define a set of standard, registered ISO 20022 messages for each SFT data-related reporting communication. This is a huge step and the use of these messages will not only hugely improve the quality and consistency of the data, particularly where reconciliation is concerned, but also create a much more level playing field in TR terms, with firms able to select or change repositories on the basis of price and performance and without the hassle and expense of adapting to different proprietary formats.
REGIS-TR was the first TR to provide a client testing environment for basic XML schema validation. Our current user acceptance testing (UAT), based on the most recent (20 December) ISO 20022 schemas, is up and running and in use both by our clients and by other firms looking to test our SFTR and other solutions. We are adding to this UAT environment gradually and are aiming for full SFTR UAT reporting functionality in February.
We are also providing various tools to assist clients with the new reporting regime, including a clear and comprehensive handbook, early onboarding and access to governing documents, various training modules offered by Market FinReg, which can be held on client sites, and a planned UAT demo video in English, French, German or Spanish.
SFTR is a specialised, complex niche, and all firms should report to a TR that can provide both expert market knowledge and swift, responsive service support. We stay very close to our clients to help them through the entire lifecycle of regulatory reporting and, while we cannot provide legal or regulatory guidance, if you have an exception management problem, or a technical issue, we will find you the right person to provide technical advice.
Our support network, which is free of charge to our clients, offers fluency in all the main European languages in addition to several others. We have a proactive client services team with profound expertise in technical systems and reporting regulation, with a response time averaging three hours. We work with our clients if an issue proves complex, constantly stress-test our systems and contact a client directly if our monitoring tools detect an unexpected change in reporting patterns. Our relationship managers, who can be contacted directly for assistance with all aspects of our regulatory services, also hold regular user groups throughout Europe to discuss current issues and regulatory developments.
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