Meeting the efficiency challenge
03 July 2020
Simon Davies, of Pirum Systems, presents the case that SFTR’s challenges should be met by an increased focus on driving operational efficiencies
Image: Simon Davies
When the Securities Financing Transactions Regulation (SFTR) was first dreamt up by regulators in 2015, few securities finance professionals could have foreseen the complexity the regulation would create and the amount of effort that would be required to implement it and adhere to it.
Much has been written about the reporting requirements and what to report, here we look at the impacts of this on firm’s day to day operations. The associated challenges are complex, and we explore how, through increased operational efficiency, firms can deal with these.
As we go to print, the first two phases of reporting participants affected (credit institutions, central counterparties and central securities depositories) will be going live. Phase one was delayed from April due to the impacts of COVID-19, and firms will be managing their initial report submissions to the trade repository (TR) with their day-to-day operations, and the competing and often conflicting demands that these two may have.
As we know, there is a very tight timeframe for the market to get reports to the chosen TR, as well as any modifications to open trades on a T+1 basis for stock loan, repo and buy-sell backs (BSB), not forgetting the associated collateral information at either a trade level or a position level daily. In addition, the termination of open trades, including early termination of a term trade needs to be reported, and errors or corrections also need to be notified.
So far so good (hopefully), but we estimate that a typical securities finance trade will have 210 reportable events over its lifetime with the average tenor of a trade at 90 days, so multiplying this against a firm’s open positions will give the many thousands, if not hundreds of thousands of reportable events on a daily basis depending on the book size and business complexity. Even a small number of issues or exceptions will quickly escalate into problems with firms managing their reporting obligation while trying to get on with their day to day activities. With the aim of learning from EMIR, linking the standards of reporting to your BAU processes will be key to achieving better exceptions rates for SFTR.
However, the effort required in managing the reporting process is also complicated by the bifurcation of firms current BAU processes and what is needed to support SFTR reporting (See Figure 1, overleaf). Broadly, SFTR is a contractually based reporting regime, with little regard to what is happening in the economic real world – I say broadly, as this is complicated further between what is required to report the starting transaction or ‘on-leg’, and what is required to be reported for lifecycle events. With the new trade being reported on a trade basis, and lifecycle events split between trade-based reporting and the contractual basis of the lifecycle event and collateral needs to be reported, at either a trade or net basis, albeit as of the end of the day too. In addition, a significant amount of the data used in SFTR reports is required specifically to meet the reporting requirements, however, there is a large overlap of the data used in both SFTR reporting and firms BAU processes and any issues with that data will need to be reviewed by the teams currently using that data for their processes, firstly to avoid duplication, but also because they own this data and it is critical for their processes and controls.
What needs to be reported and the data involved has very specific conditionality, validation rules and timing requirements, and grappling with these nuances whilst trying to get day-to-day activities completed will be time-consuming and could result in a relative importance decision.
Regulatory reporting requires a thorough understanding of these requirements, and they are complex, however, BAU teams are grappling with managing settlement and collateral processes that are looked at on an actual basis, the focus for these teams is risk management and getting things done in very compressed time scales, of hours if not minutes, and ensuring processing is efficient. They simply are not focused on dealing with the finer nuances of legal entity identifier (LEI) mapping or grappling with who should have generated and shared a UTI with their counterpart.
The goal for firms on day one of the regulation go-live has been to ensure smooth reporting to the trade repository, and to achieve this they need to ensure that there is effective sharing of UTIs with counterparts. There is also added complication with sharing agent lender allocations between firms on a T+0 basis – this affects both agency lending and agency repo, although the latter is often overlooked. Prior to SFTR go-live, firms have focused less on the causes of matching breaks – the breaks occurring between firms on individual data fields, than on making sure the trade pairs so that UTI sharing can take place, although this focus has now changed and the enormity of the challenge is starting to dawn on firms.
When we look at the type of breaks that are occurring during pre-production testing, we see some common themes across the 140 institutions signed up for our joint SFTR service with IHS Markit. Many issues are because of poor reference data, and it is also worth noting the much tighter tolerances SFTR has compared to what firms would normally consider an issue. However, when looking beyond this many of the breaks are due to lifecycle event processing - due to later booking of the event on one side of the trade or booking errors due to manual processing.
Additionally, the way firms process their events or modifications can be different, with one side of the trade processing this as a rebooking, with the other as a modification. This is often driven by systems limitations or workarounds that firms have adopted over many years, and due to the same system limitations or that up/downstream requirements are difficult to unpick and remediate without causing bigger challenges.
So, they are finding that trades pair and data items match on new trades, but they quickly get out of line when the day to day processing – returns, marks and collateral management start. Consequently, this could be our industries tidal moment, or as the sage of Omaha, Warren Buffet said: “Only when the tide goes out do you discover who’s been swimming naked”
The challenge for firms is to marry these competing demands, adjust their operating model – the processes (automated or manual) and the technology that delivers these, whilst introducing new processes to support the reporting requirements. Not a simple thing to achieve, and we have seen an increase in firms grappling with this challenge in recent weeks as the go-live date approached, and the enormity of the impact becomes apparent.
I had an interesting conversation just recently, with an operations team, that had just become involved in how they were going to need to manage SFTR breaks, and was told: “But it doesn’t work that way, how are we going to cope with this?” I think this sums up the situation of the competing and immovable demands of their day job and what regulators want to see.
Of course, there are also huge benefits to be gained. Improving process efficiency will not only help prevent and reduce errors but also save time – both in terms of effort and latency. This is going to be critical in dealing with SFTR, but also that other regulation looming over the industry – CSDR. As firms grapple with managing risk and reducing inefficiency in managing their processes for regulatory reporting, they will need to become much more efficient in managing fails – not just for their stock loan and repo books, but securities finance will be critical in minimising fails in their cash settlements businesses too.
However, in order to achieve this, firms will be looking at rapidly shrinking securities financing settlement times, and some of these are already pushed to the limit–not only do you need to agree, book, instruct – often the trade needs to be collateralised before it can settle – particularly when facing agent lenders that require pre-collateralisation before they will instruct their side of the trade for settlement. To achieve this, firms must improve their business practices and they need to drive latency out of their processes and enhance controls. This adds another element to the drive for efficiency.
All these challenges have been a catalyst for most firms to look to improve their efficiency and how they can deliver best in breed operations to support their businesses, clients and achieve compliance.
This is why at Pirum, we have seen a huge increase in the level of automation that firms are seeking to achieve – particularly around managing lifecycle events, exception management and workflow across all their business activities, including margin and collateral management.
As shown overleaf in figure 2, year-on-year, we’ve seen an increase in returns automation of 69 percent, marks of 35 percent and exposure of 111 percent driven by our client’s desire to minimise the impacts of these on SFTR reporting and due to a general desire to be more efficient.
By implementing real-time lifecycle processing, firms can achieve STP rates of 99 percent and reduce breaks by 86 perent. Tools that help minimise manual effort and the resulting timing differences and errors that occur as a result and those that help to streamline the remediation of issues when they do occur.
This benefits both firms’ business-as-usual operations – helping to minimise risk and profit-and-loss impacts and improves controls, but also ultimately the smooth reporting to the TR for SFTR reporting by minimising exceptions.
In addition, this not only increases straight-through-processing rates, minimises breaks and fails, but also hugely compresses the latency that occurs in some processes, increasing firms capacity to speed up processes and compress settlement timescales – thereby preparing their businesses to support the CSDR regime.
Being able to bring together your post-trade management, collateral management and trade reporting, with seamless workflow and data sharing – whilst managing the different views, drivers and needs of each of these will help manage risk, drive efficiency in the future and deliver best in class processes and procedures.
Figure 1: BAU and SFTR reporting driver comparison
Figure 2: Industry automation trends
Figure 3: Efficiency – bringing together processes through common workflow and data sharing
Much has been written about the reporting requirements and what to report, here we look at the impacts of this on firm’s day to day operations. The associated challenges are complex, and we explore how, through increased operational efficiency, firms can deal with these.
As we go to print, the first two phases of reporting participants affected (credit institutions, central counterparties and central securities depositories) will be going live. Phase one was delayed from April due to the impacts of COVID-19, and firms will be managing their initial report submissions to the trade repository (TR) with their day-to-day operations, and the competing and often conflicting demands that these two may have.
As we know, there is a very tight timeframe for the market to get reports to the chosen TR, as well as any modifications to open trades on a T+1 basis for stock loan, repo and buy-sell backs (BSB), not forgetting the associated collateral information at either a trade level or a position level daily. In addition, the termination of open trades, including early termination of a term trade needs to be reported, and errors or corrections also need to be notified.
So far so good (hopefully), but we estimate that a typical securities finance trade will have 210 reportable events over its lifetime with the average tenor of a trade at 90 days, so multiplying this against a firm’s open positions will give the many thousands, if not hundreds of thousands of reportable events on a daily basis depending on the book size and business complexity. Even a small number of issues or exceptions will quickly escalate into problems with firms managing their reporting obligation while trying to get on with their day to day activities. With the aim of learning from EMIR, linking the standards of reporting to your BAU processes will be key to achieving better exceptions rates for SFTR.
However, the effort required in managing the reporting process is also complicated by the bifurcation of firms current BAU processes and what is needed to support SFTR reporting (See Figure 1, overleaf). Broadly, SFTR is a contractually based reporting regime, with little regard to what is happening in the economic real world – I say broadly, as this is complicated further between what is required to report the starting transaction or ‘on-leg’, and what is required to be reported for lifecycle events. With the new trade being reported on a trade basis, and lifecycle events split between trade-based reporting and the contractual basis of the lifecycle event and collateral needs to be reported, at either a trade or net basis, albeit as of the end of the day too. In addition, a significant amount of the data used in SFTR reports is required specifically to meet the reporting requirements, however, there is a large overlap of the data used in both SFTR reporting and firms BAU processes and any issues with that data will need to be reviewed by the teams currently using that data for their processes, firstly to avoid duplication, but also because they own this data and it is critical for their processes and controls.
What needs to be reported and the data involved has very specific conditionality, validation rules and timing requirements, and grappling with these nuances whilst trying to get day-to-day activities completed will be time-consuming and could result in a relative importance decision.
Regulatory reporting requires a thorough understanding of these requirements, and they are complex, however, BAU teams are grappling with managing settlement and collateral processes that are looked at on an actual basis, the focus for these teams is risk management and getting things done in very compressed time scales, of hours if not minutes, and ensuring processing is efficient. They simply are not focused on dealing with the finer nuances of legal entity identifier (LEI) mapping or grappling with who should have generated and shared a UTI with their counterpart.
The goal for firms on day one of the regulation go-live has been to ensure smooth reporting to the trade repository, and to achieve this they need to ensure that there is effective sharing of UTIs with counterparts. There is also added complication with sharing agent lender allocations between firms on a T+0 basis – this affects both agency lending and agency repo, although the latter is often overlooked. Prior to SFTR go-live, firms have focused less on the causes of matching breaks – the breaks occurring between firms on individual data fields, than on making sure the trade pairs so that UTI sharing can take place, although this focus has now changed and the enormity of the challenge is starting to dawn on firms.
When we look at the type of breaks that are occurring during pre-production testing, we see some common themes across the 140 institutions signed up for our joint SFTR service with IHS Markit. Many issues are because of poor reference data, and it is also worth noting the much tighter tolerances SFTR has compared to what firms would normally consider an issue. However, when looking beyond this many of the breaks are due to lifecycle event processing - due to later booking of the event on one side of the trade or booking errors due to manual processing.
Additionally, the way firms process their events or modifications can be different, with one side of the trade processing this as a rebooking, with the other as a modification. This is often driven by systems limitations or workarounds that firms have adopted over many years, and due to the same system limitations or that up/downstream requirements are difficult to unpick and remediate without causing bigger challenges.
So, they are finding that trades pair and data items match on new trades, but they quickly get out of line when the day to day processing – returns, marks and collateral management start. Consequently, this could be our industries tidal moment, or as the sage of Omaha, Warren Buffet said: “Only when the tide goes out do you discover who’s been swimming naked”
The challenge for firms is to marry these competing demands, adjust their operating model – the processes (automated or manual) and the technology that delivers these, whilst introducing new processes to support the reporting requirements. Not a simple thing to achieve, and we have seen an increase in firms grappling with this challenge in recent weeks as the go-live date approached, and the enormity of the impact becomes apparent.
I had an interesting conversation just recently, with an operations team, that had just become involved in how they were going to need to manage SFTR breaks, and was told: “But it doesn’t work that way, how are we going to cope with this?” I think this sums up the situation of the competing and immovable demands of their day job and what regulators want to see.
Of course, there are also huge benefits to be gained. Improving process efficiency will not only help prevent and reduce errors but also save time – both in terms of effort and latency. This is going to be critical in dealing with SFTR, but also that other regulation looming over the industry – CSDR. As firms grapple with managing risk and reducing inefficiency in managing their processes for regulatory reporting, they will need to become much more efficient in managing fails – not just for their stock loan and repo books, but securities finance will be critical in minimising fails in their cash settlements businesses too.
However, in order to achieve this, firms will be looking at rapidly shrinking securities financing settlement times, and some of these are already pushed to the limit–not only do you need to agree, book, instruct – often the trade needs to be collateralised before it can settle – particularly when facing agent lenders that require pre-collateralisation before they will instruct their side of the trade for settlement. To achieve this, firms must improve their business practices and they need to drive latency out of their processes and enhance controls. This adds another element to the drive for efficiency.
All these challenges have been a catalyst for most firms to look to improve their efficiency and how they can deliver best in breed operations to support their businesses, clients and achieve compliance.
This is why at Pirum, we have seen a huge increase in the level of automation that firms are seeking to achieve – particularly around managing lifecycle events, exception management and workflow across all their business activities, including margin and collateral management.
As shown overleaf in figure 2, year-on-year, we’ve seen an increase in returns automation of 69 percent, marks of 35 percent and exposure of 111 percent driven by our client’s desire to minimise the impacts of these on SFTR reporting and due to a general desire to be more efficient.
By implementing real-time lifecycle processing, firms can achieve STP rates of 99 percent and reduce breaks by 86 perent. Tools that help minimise manual effort and the resulting timing differences and errors that occur as a result and those that help to streamline the remediation of issues when they do occur.
This benefits both firms’ business-as-usual operations – helping to minimise risk and profit-and-loss impacts and improves controls, but also ultimately the smooth reporting to the TR for SFTR reporting by minimising exceptions.
In addition, this not only increases straight-through-processing rates, minimises breaks and fails, but also hugely compresses the latency that occurs in some processes, increasing firms capacity to speed up processes and compress settlement timescales – thereby preparing their businesses to support the CSDR regime.
Being able to bring together your post-trade management, collateral management and trade reporting, with seamless workflow and data sharing – whilst managing the different views, drivers and needs of each of these will help manage risk, drive efficiency in the future and deliver best in class processes and procedures.
Figure 1: BAU and SFTR reporting driver comparison
Figure 2: Industry automation trends
Figure 3: Efficiency – bringing together processes through common workflow and data sharing
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