ISLA SFTR working group panel discussion
07 July 2020
Members of ISLA’s SFTR Working Group discuss the upcoming regulation and the journey they took to get here
Image: retrorocket/shutterstock.com
Panellists
Adrian Dale, Head of regulation & market practice,
International Securities Lending Association
Paul Bradford, Trading desk head, European equity lending, repo and TRS, ING
Caroline McGinniss, Operations senior specialist, Goldman Sachs
Ed Oliver, Managing director, product development, eSecLending (Europe)
How well did the working group come together to solve SFTR issues?
Adrian Dale: From the outset, there was very good engagement from our members. Working groups can be run in various ways, from small focus groups to large all-are-welcome events. The later can sometimes reduce engagement, and so a smaller SFTR Steering Committee (SteerCo) was created to be representative of our industry, drawing from the most active members in those early meetings. The SteerCo primary group members attended meetings in person and were called upon to provide feedback, documentation and supporting examples. They also assisted in presenting to regulators throughout the project. Of course, all members were welcome to the working group, many just listening in by phone to keep track of developments. This then created average working groups sizes between 100-200 throughout the 12 months.
This robust engagement from member resulted in good market consensus on both the understanding of the regulation and ultimately how to reports securities lending activity.
Caroline McGinniss: Extremely well, having a diverse population of market participants with deep-rooted expertise in the product, combined with ISLA’s ability to navigate the regulators were a key reason why it worked so well.
Paul Bradford: I think the International Securities Lending Association (ISLA) did a fantastic job pulling in participants from the various parts of our industry into one forum and at an early stage in the overall process. It allowed everyone to have their say on what are some quite difficult issues, some of them which seemed really basic at the time such as booking practices. I think the working group challenged participants to ask themselves ‘have we thought of that/how will we deal with that?’ and encouraged them to take the learning back to their own organisations. There wasn’t a bias towards any service providers or trade providers for the Securities Financing Transactions Regulation (SFTR), which I think was very important way to manage it. Industry best practise and practical guidance around each and every field, albeit painstaking work at the time, has had a hugely positive impact for firms and their own projects and builds. Overall though, bringing everyone together to discuss issues and ideas has been the main positive, and has steered organisations down a very similar path in terms of how this major regulatory change is dealt with within.
Ed Oliver: This was the first time I can recall that a group of securities finance professionals came together to discuss detailed technical issues at an industry level. Everyone came from different firms, different backgrounds and with different perspectives on some of the technical elements of SFTR data. I think all of us who were in the initial meetings will admit it took three or four meetings for the group to settle in and learn how to work together. However, once this happened, the approach was superb. I commend ISLA too – they recognised the need to apply resources to this working group and committed to do so. Without that central hub, we would not have got to where we are today – with an effective best practice approach to the application of the individual data fields. It is also worth noting in this environment of working from home and conference calls, that being at a 2-3 hour meeting in person was most impactful. I suspect we would have struggled more if we had been kicking off this project over the past three months via conference calls.
If, as some suggest, there will be further iterations of SFTR, what lessons could be learned by the ISLA taskforce and applied to future rule changes?
Bradford: I think the ISLA approach was very good and led to positive debate and discussion. The key is always having representatives from all sides of the industry to ensure that the proposals and outcomes are balanced and therefore widely accepted.
Dale: SFTR is due to be reviewed in Q1 2022 (see ISLA regulatory roadmap) and ISLA will continue to host SFTR SteerCo meetings on each month until that group stop or reduce its frequency. The primary aim of the group going forward will be to gather feedback and keep regulators updated on progress, raising proposals or highlighting areas that may require review or clarification. We are sure that other trade associations, and the trade repositories, will do the same.
The first phase of SFTR was delayed until July, which has allowed many first to extend their solution testing periods. Does this mean SFTR should have better trade matching rates than other regulations, such as the European Markets Infrastructure Regulation (EMIR)?
McGinniss: I would predict a better pairing rate of transactions, not necessarily due to the delay but because we have well-established industry vendors in the securities lending space who already provided real-time automated trade matching services prior to SFTR. This has been an excellent foundation for these vendors to build enhanced SFTR reconciliations that will allow an automated exchange of unique transaction identifiers (UTI) and other key SFTR details.
Oliver: For securities lending transactions, our industry’s existing reconciliation processes, such as contract and compare, will put securities lending participants in a naturally better position than those who reported under EMIR. Many of our data points are reconciled already. The extension has helped ensure that our firms are prepared for the 13 July data delivery by virtue of having more time to test – the matching won’t really occur until October when there will be two-sided reporting. The phase-three date has not been moved back, so I would argue the phase-one extension is not really impactful to matching rates.
Dale: In recent virtual conferences, we heard that testing was well underway and using the extra time to undertake a deeper analysis of reporting issues than would have been possible. Overall, one could say a this is at least one positive outcome from what has been a very difficult and unpleasant time.
Bradford: Yes I think so. From ING’s perspective, the extra three months has given us the time to test with many more counterparties than we were expecting to, and that can only be positive as issues are ironed out prior to the go-live. I’m not for a second saying that there won’t be issues go-live but the fundamental problems and hurdles will have been cleared, and that can only be a good thing for trade matching at the outset.
In the final weeks before go-live and beyond, what challenges does the market still have to overcome on SFTR?
Oliver: I am focused on the October date as that is when eSecLending’s clients will need to report – albeit in all cases the reporting has been delegated to us. Between now and then there will be a number of items to address. Testing and reconciliation with our counterparties will continue, with a focus on data fields subject to reconciliation in October. We need to help our clients understand how to perform oversight on the SFTR outputs they will see from their trade repositories and which data fields they should expect to see breaks. The work that the ISLA working group has done will help with the explanation as to why there are data breaks (price and foreign exchange data source differences for example), and benchmarking data in the trade repository outputs will also help.
Dale: Some of the familiar issues are still present such as synchronisation of lifecycle events, compounded by the previous gap in standard representation of our industry. The other challenge is reference data. This comes in several areas such as legal entity identifiers (LEI) for counterparty or asset issuer but also extends in jurisdiction or rating.
Considerable effort has been spent on these challenges and, as the live data feeds through, ISLA will work with members using the resulting quantification to prioritise what further effort is required to help solve them.
Bradford: I have been surprised by the amount of hard work the ING project team have had to do to agree UTI sharing arrangements, and we are now in a great spot whereby there are very few customers that we still have outstanding for this to be agreed. We started on that pretty early and it will be a significant challenge for those who are only just embarking on that process. For me, that has been the most difficult part given the array of different solutions that are out there, and unless everyone has agreed with every counterparty how this will happen there will be reporting issues.
McGinniss: I see the largest challenge in the agency lending space where for buy-side participants facing an agent lender the accuracy, timeliness and completeness of our reporting is highly dependent on the data provided by these lenders via vendor platforms. Given the complexity of the reporting requirements, this has been one of the biggest implementation challenges.
Concerns remain about LEI adoption within and outside the EU. Third-country counterparts have a one-year LEI exemption under SFTR, but LEI coverage is not complete in the EU either. How big a problem is this?
Bradford: I think it is a concern but not a large one. Our policy here at ING from a counterparty perspective is quite simple; no LEI, no trade. If a similar approach is taken by the majority of other market counterparts (and how can they actually report without one?) then clearly if they want to be involved in any way in this market they need to get an LEI. It isn’t expensive and not too onerous a process so I don’t believe it will cause too much of a problem. But I think it is that straight forward and will become apparent pretty quickly. The bigger challenge will be in terms of securities not having the LEI of issuer, but if the market removes those securities from lending programmes, collateral sets etc, there will be an impact on the market liquidity which will hopefully then give the impetus to get an LEI.
Dale: ISLA asked members to submit lists of International Securities Identification Number (ISINs) that did not have associated issuer LEIs’ and consequently received more than 40,000 unique ISINs. Those ISINs were then reviewed by data vendors, Global Legal Entity Identifier Foundation and ANNA with further data applied regarding outstanding and available to lend values. The resulting picture shows that Issuer LEIs to ISIN mapping over the past 18 months has improved, approximately 8 percent of on-loan securities still requiring Issue LEI and more should be done to update securities reference data within firms. The improvement in mapping is most pronounced regarding EU securities, non-European Economic Area securities by contract are not improved with circa €4 trillion of lendable assets missing an issuer LEI. As many collateral portfolios have balances of EU and non-EU assets, and validation rules in SFTR will NACK any data block with a missing Issue LEI, firms must decide how to be compliant. Either holding back reporting, reporting and NACKing or removing that asset from lending. ISLA will continue to work on improving LEI registration with members, data vendors, GLEIF and ANNA and are extremely grateful for all the work they have done to date.
UTI generation and exchange is another lingering concern, especially for buy-side firms that are considering taking on SFTR reporting obligations themselves. What challenges does this bring to the table and what can ISLA or the wider market do to help?
Dale: The ISLA SFTR working group identified this as an issue some time ago and created a standard template that contained the minimum number of fields to exchange data between counterparts. That template has grown to incorporate repos and been upgraded to a more formalised XML schema. ISLA also proposed using the UTI waterfall, with a focus on the European Securities and Markets Authority’s scenario two, that allows counterparts to agree who should generate the UTI. In addition to this, we recommend counterparties reach out to each other prior to go-live to agree who sends what and when. Of course, much of this can be accomplished through vendor products that not only reconcile between parties but also offer a data exchanges data and UTI generation services. For buy-side firms, it is critical they approach this topic with a solid understanding of what their counterparts are doing and what their own responsibilities and obligations are.
McGinniss: I actually am very optimistic about the UTI exchange process as a significant percentage of the securities lending market participants have opted to use one of the vendor solutions available for automated trade pairing and UTI generation/sharing.
Bradford: I believe this to be the biggest issue the market has. It really becomes a bespoke agreement with most as to how this is done and options are severely limited depending on the solution that your firm has chosen to go with. We have found that in a few cases with counterparties there is really no automated way this can be done that doesn’t involve paying for a solution provider in one-way shape or form, and this inevitably will mean manual intervention for some. Clearly that is not something that I believe is a direction that we want to go in as a market, our future is about digitalising workflows etc and to me this seems like a step backwards. A market centralised solution whereby UTIs can be posted and received would be ideal but someone has to build that, and that naturally incurs a further cost, something which I don’t think anyone wants right now.
There are several service providers offering various SFTR solutions, but this creates friction between counterparts that do not subscribe to the same vendor. Would some level on interoperability between service providers benefit the industry?
Dale: One of the reasons we proposed the minimum standard template was to support interoperability and so, in the group that discussed and validation that template, we invited vendors to work together on its formation.
Bradford: This links directly to the points earlier about the challenges around UTI generation and sharing. Lack of interoperability has forced firms to pay for more than one service provider in order to continue to do business with existing counterparties. This will overall be detrimental to the market. I think seamless interoperability between providers would reduce costs and increase efficiency in the process no end, and may encourage some of the smaller firms to at least take on one provider rather than none because no single one allows them to connect with their existing counterparties.
SFTR will bring a level of transparency to the market that we’ve never known before. What opportunities could this bring?
McGinniss: I would hope firms will continue to use their SFTR reporting obligation as a lever to drive further automation of our product.
Dale: SFTR could offer many benefits, not least addressing the lack of transparency identified by regulators in 2008. But looking outward from that, it is starting our industry along a path to data and lifecycle standardisation that will balance some of the ingrained legacy issues that needed reviewing. However, I would not like to overstate its benefit in this area as it is only a start, so will have associated missteps and of course multiple inspirational quotes related to going in the right direction.
Bradford: I think there are a couple of real positives here. Firstly the market has been forced to go through a significant review of how we do our business, how we book it, how we manage the lifecycle events etc and many have had to make changes to ensure SFTR compliance. This for me can only serve us well as we move as an industry towards digitalising our flows and documentation over the coming months and years. Secondly, I hope that the sheer amount of information being provided to the regulators daily will mean that any further regulations will be much easier to adopt and adhere to, as all of the information required should already be there.
Oliver: I think there are positives. We now have a standard reporting framework which, once some of the existing idiosyncrasies are cleared up in SFTR 2.0, could become the template for the industry. As many clients want to see data feeds, we could potentially use the SFTR standard to provide everything anyone could need. ISLA is also looking to use this as a basis for its Common Domain Model (CDM) project. One other consideration is the approach other regulators may take to obtaining the same sort of data transparency. If they also adopt SFTR-like reporting, then hopefully the implementation will be easier.
Adrian Dale, Head of regulation & market practice,
International Securities Lending Association
Paul Bradford, Trading desk head, European equity lending, repo and TRS, ING
Caroline McGinniss, Operations senior specialist, Goldman Sachs
Ed Oliver, Managing director, product development, eSecLending (Europe)
How well did the working group come together to solve SFTR issues?
Adrian Dale: From the outset, there was very good engagement from our members. Working groups can be run in various ways, from small focus groups to large all-are-welcome events. The later can sometimes reduce engagement, and so a smaller SFTR Steering Committee (SteerCo) was created to be representative of our industry, drawing from the most active members in those early meetings. The SteerCo primary group members attended meetings in person and were called upon to provide feedback, documentation and supporting examples. They also assisted in presenting to regulators throughout the project. Of course, all members were welcome to the working group, many just listening in by phone to keep track of developments. This then created average working groups sizes between 100-200 throughout the 12 months.
This robust engagement from member resulted in good market consensus on both the understanding of the regulation and ultimately how to reports securities lending activity.
Caroline McGinniss: Extremely well, having a diverse population of market participants with deep-rooted expertise in the product, combined with ISLA’s ability to navigate the regulators were a key reason why it worked so well.
Paul Bradford: I think the International Securities Lending Association (ISLA) did a fantastic job pulling in participants from the various parts of our industry into one forum and at an early stage in the overall process. It allowed everyone to have their say on what are some quite difficult issues, some of them which seemed really basic at the time such as booking practices. I think the working group challenged participants to ask themselves ‘have we thought of that/how will we deal with that?’ and encouraged them to take the learning back to their own organisations. There wasn’t a bias towards any service providers or trade providers for the Securities Financing Transactions Regulation (SFTR), which I think was very important way to manage it. Industry best practise and practical guidance around each and every field, albeit painstaking work at the time, has had a hugely positive impact for firms and their own projects and builds. Overall though, bringing everyone together to discuss issues and ideas has been the main positive, and has steered organisations down a very similar path in terms of how this major regulatory change is dealt with within.
Ed Oliver: This was the first time I can recall that a group of securities finance professionals came together to discuss detailed technical issues at an industry level. Everyone came from different firms, different backgrounds and with different perspectives on some of the technical elements of SFTR data. I think all of us who were in the initial meetings will admit it took three or four meetings for the group to settle in and learn how to work together. However, once this happened, the approach was superb. I commend ISLA too – they recognised the need to apply resources to this working group and committed to do so. Without that central hub, we would not have got to where we are today – with an effective best practice approach to the application of the individual data fields. It is also worth noting in this environment of working from home and conference calls, that being at a 2-3 hour meeting in person was most impactful. I suspect we would have struggled more if we had been kicking off this project over the past three months via conference calls.
If, as some suggest, there will be further iterations of SFTR, what lessons could be learned by the ISLA taskforce and applied to future rule changes?
Bradford: I think the ISLA approach was very good and led to positive debate and discussion. The key is always having representatives from all sides of the industry to ensure that the proposals and outcomes are balanced and therefore widely accepted.
Dale: SFTR is due to be reviewed in Q1 2022 (see ISLA regulatory roadmap) and ISLA will continue to host SFTR SteerCo meetings on each month until that group stop or reduce its frequency. The primary aim of the group going forward will be to gather feedback and keep regulators updated on progress, raising proposals or highlighting areas that may require review or clarification. We are sure that other trade associations, and the trade repositories, will do the same.
The first phase of SFTR was delayed until July, which has allowed many first to extend their solution testing periods. Does this mean SFTR should have better trade matching rates than other regulations, such as the European Markets Infrastructure Regulation (EMIR)?
McGinniss: I would predict a better pairing rate of transactions, not necessarily due to the delay but because we have well-established industry vendors in the securities lending space who already provided real-time automated trade matching services prior to SFTR. This has been an excellent foundation for these vendors to build enhanced SFTR reconciliations that will allow an automated exchange of unique transaction identifiers (UTI) and other key SFTR details.
Oliver: For securities lending transactions, our industry’s existing reconciliation processes, such as contract and compare, will put securities lending participants in a naturally better position than those who reported under EMIR. Many of our data points are reconciled already. The extension has helped ensure that our firms are prepared for the 13 July data delivery by virtue of having more time to test – the matching won’t really occur until October when there will be two-sided reporting. The phase-three date has not been moved back, so I would argue the phase-one extension is not really impactful to matching rates.
Dale: In recent virtual conferences, we heard that testing was well underway and using the extra time to undertake a deeper analysis of reporting issues than would have been possible. Overall, one could say a this is at least one positive outcome from what has been a very difficult and unpleasant time.
Bradford: Yes I think so. From ING’s perspective, the extra three months has given us the time to test with many more counterparties than we were expecting to, and that can only be positive as issues are ironed out prior to the go-live. I’m not for a second saying that there won’t be issues go-live but the fundamental problems and hurdles will have been cleared, and that can only be a good thing for trade matching at the outset.
In the final weeks before go-live and beyond, what challenges does the market still have to overcome on SFTR?
Oliver: I am focused on the October date as that is when eSecLending’s clients will need to report – albeit in all cases the reporting has been delegated to us. Between now and then there will be a number of items to address. Testing and reconciliation with our counterparties will continue, with a focus on data fields subject to reconciliation in October. We need to help our clients understand how to perform oversight on the SFTR outputs they will see from their trade repositories and which data fields they should expect to see breaks. The work that the ISLA working group has done will help with the explanation as to why there are data breaks (price and foreign exchange data source differences for example), and benchmarking data in the trade repository outputs will also help.
Dale: Some of the familiar issues are still present such as synchronisation of lifecycle events, compounded by the previous gap in standard representation of our industry. The other challenge is reference data. This comes in several areas such as legal entity identifiers (LEI) for counterparty or asset issuer but also extends in jurisdiction or rating.
Considerable effort has been spent on these challenges and, as the live data feeds through, ISLA will work with members using the resulting quantification to prioritise what further effort is required to help solve them.
Bradford: I have been surprised by the amount of hard work the ING project team have had to do to agree UTI sharing arrangements, and we are now in a great spot whereby there are very few customers that we still have outstanding for this to be agreed. We started on that pretty early and it will be a significant challenge for those who are only just embarking on that process. For me, that has been the most difficult part given the array of different solutions that are out there, and unless everyone has agreed with every counterparty how this will happen there will be reporting issues.
McGinniss: I see the largest challenge in the agency lending space where for buy-side participants facing an agent lender the accuracy, timeliness and completeness of our reporting is highly dependent on the data provided by these lenders via vendor platforms. Given the complexity of the reporting requirements, this has been one of the biggest implementation challenges.
Concerns remain about LEI adoption within and outside the EU. Third-country counterparts have a one-year LEI exemption under SFTR, but LEI coverage is not complete in the EU either. How big a problem is this?
Bradford: I think it is a concern but not a large one. Our policy here at ING from a counterparty perspective is quite simple; no LEI, no trade. If a similar approach is taken by the majority of other market counterparts (and how can they actually report without one?) then clearly if they want to be involved in any way in this market they need to get an LEI. It isn’t expensive and not too onerous a process so I don’t believe it will cause too much of a problem. But I think it is that straight forward and will become apparent pretty quickly. The bigger challenge will be in terms of securities not having the LEI of issuer, but if the market removes those securities from lending programmes, collateral sets etc, there will be an impact on the market liquidity which will hopefully then give the impetus to get an LEI.
Dale: ISLA asked members to submit lists of International Securities Identification Number (ISINs) that did not have associated issuer LEIs’ and consequently received more than 40,000 unique ISINs. Those ISINs were then reviewed by data vendors, Global Legal Entity Identifier Foundation and ANNA with further data applied regarding outstanding and available to lend values. The resulting picture shows that Issuer LEIs to ISIN mapping over the past 18 months has improved, approximately 8 percent of on-loan securities still requiring Issue LEI and more should be done to update securities reference data within firms. The improvement in mapping is most pronounced regarding EU securities, non-European Economic Area securities by contract are not improved with circa €4 trillion of lendable assets missing an issuer LEI. As many collateral portfolios have balances of EU and non-EU assets, and validation rules in SFTR will NACK any data block with a missing Issue LEI, firms must decide how to be compliant. Either holding back reporting, reporting and NACKing or removing that asset from lending. ISLA will continue to work on improving LEI registration with members, data vendors, GLEIF and ANNA and are extremely grateful for all the work they have done to date.
UTI generation and exchange is another lingering concern, especially for buy-side firms that are considering taking on SFTR reporting obligations themselves. What challenges does this bring to the table and what can ISLA or the wider market do to help?
Dale: The ISLA SFTR working group identified this as an issue some time ago and created a standard template that contained the minimum number of fields to exchange data between counterparts. That template has grown to incorporate repos and been upgraded to a more formalised XML schema. ISLA also proposed using the UTI waterfall, with a focus on the European Securities and Markets Authority’s scenario two, that allows counterparts to agree who should generate the UTI. In addition to this, we recommend counterparties reach out to each other prior to go-live to agree who sends what and when. Of course, much of this can be accomplished through vendor products that not only reconcile between parties but also offer a data exchanges data and UTI generation services. For buy-side firms, it is critical they approach this topic with a solid understanding of what their counterparts are doing and what their own responsibilities and obligations are.
McGinniss: I actually am very optimistic about the UTI exchange process as a significant percentage of the securities lending market participants have opted to use one of the vendor solutions available for automated trade pairing and UTI generation/sharing.
Bradford: I believe this to be the biggest issue the market has. It really becomes a bespoke agreement with most as to how this is done and options are severely limited depending on the solution that your firm has chosen to go with. We have found that in a few cases with counterparties there is really no automated way this can be done that doesn’t involve paying for a solution provider in one-way shape or form, and this inevitably will mean manual intervention for some. Clearly that is not something that I believe is a direction that we want to go in as a market, our future is about digitalising workflows etc and to me this seems like a step backwards. A market centralised solution whereby UTIs can be posted and received would be ideal but someone has to build that, and that naturally incurs a further cost, something which I don’t think anyone wants right now.
There are several service providers offering various SFTR solutions, but this creates friction between counterparts that do not subscribe to the same vendor. Would some level on interoperability between service providers benefit the industry?
Dale: One of the reasons we proposed the minimum standard template was to support interoperability and so, in the group that discussed and validation that template, we invited vendors to work together on its formation.
Bradford: This links directly to the points earlier about the challenges around UTI generation and sharing. Lack of interoperability has forced firms to pay for more than one service provider in order to continue to do business with existing counterparties. This will overall be detrimental to the market. I think seamless interoperability between providers would reduce costs and increase efficiency in the process no end, and may encourage some of the smaller firms to at least take on one provider rather than none because no single one allows them to connect with their existing counterparties.
SFTR will bring a level of transparency to the market that we’ve never known before. What opportunities could this bring?
McGinniss: I would hope firms will continue to use their SFTR reporting obligation as a lever to drive further automation of our product.
Dale: SFTR could offer many benefits, not least addressing the lack of transparency identified by regulators in 2008. But looking outward from that, it is starting our industry along a path to data and lifecycle standardisation that will balance some of the ingrained legacy issues that needed reviewing. However, I would not like to overstate its benefit in this area as it is only a start, so will have associated missteps and of course multiple inspirational quotes related to going in the right direction.
Bradford: I think there are a couple of real positives here. Firstly the market has been forced to go through a significant review of how we do our business, how we book it, how we manage the lifecycle events etc and many have had to make changes to ensure SFTR compliance. This for me can only serve us well as we move as an industry towards digitalising our flows and documentation over the coming months and years. Secondly, I hope that the sheer amount of information being provided to the regulators daily will mean that any further regulations will be much easier to adopt and adhere to, as all of the information required should already be there.
Oliver: I think there are positives. We now have a standard reporting framework which, once some of the existing idiosyncrasies are cleared up in SFTR 2.0, could become the template for the industry. As many clients want to see data feeds, we could potentially use the SFTR standard to provide everything anyone could need. ISLA is also looking to use this as a basis for its Common Domain Model (CDM) project. One other consideration is the approach other regulators may take to obtaining the same sort of data transparency. If they also adopt SFTR-like reporting, then hopefully the implementation will be easier.
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