The hidden cost of SFTR
SFTR, the forthcoming regulation designed to bring shadow banking into the light, has been heavily criticised by market participants for being too expensive to implement. In brief, by enforcing a raft of new reporting and collateral requirements on those using securities finance transactions (i.e. any transaction where securities are used to borrow cash, or vice versa), ESMA (the regulator) hopes to:
- monitor risk exposures and take better-targeted and timelier actions
- improve transparency for investors
- ensure clients or counterparties have given their consent before collateral reuse can take place.
The majority of market participants agree with the principles of the regulation and are under no illusion that its implementation will come at a cost. However, many rightly argue that the reporting data requirements set out in the draft RTS document go too far, and threaten to undermine the regulation.
Deutsche Börse, which operates much of Europe’s clearing infrastructure, has criticised the requirement for original bi-lateral Unique Transaction Identifiers (UTIs) to be reported to CCPs if the transaction is subsequently novated*. Should differing UTIs be reported to the CCP by the counterparties, they have no idea what to do. This is just one example of how the cost of implementing such strict and granular data requirements has been underestimated by the industry and ESMA. Only recently are some beginning to realise what a challenge SFTR in its current state will pose.
In an attempt to get around the problem, ISLA (who has also been scathing of the costs associated with SFTR), has proposed the use of industry surveys to collate certain data points, as opposed to daily transaction reporting*. However, this fails to address the fundamental problem – data which the industry currently doesn’t measure, collect, store and report is going to be needed by ESMA, imminently.
The impact of SFTR will be profound as banks prepare to address data gaps and adopt new reporting and collateral requirements. With the final consultation paper on the RTS published on 30th September 2016, there’s still time for the industry to influence the regulation. However, without ESMA acknowledging that some of its data requirements are pushing too far, the regulation may fail to yield the intended results.