SFTR: Don’t wait for the starting gun

The industry is eagerly awaiting the European Commission to adopt the Regulatory Technical Standards for the Transaction Reporting component of the Securities Financing Transactions Regulation (SFTR), that will give investment firms one year to implement their solutions before go-live.

Whilst there’s been a temptation to wait for this starting pistol, there’s plenty of pre-race prep firms can be doing to secure resources, perform analysis, develop requirements and leverage current solutions.

From our conversations within the industry, participants’ activities are at varying stages of maturity; some are well into the analysis phase whilst others are yet to formally mobilise their programmes. Each firm may have its own Achilles heel when it comes to implementing change; for some this will be legacy reporting system issues, for others data capture and quality problems and all are vulnerable to poorly defined business requirements.

Firms shouldn’t focus only on compliance, but building the best possible solution with the available resources. As with other regulations, businesses should choose to see this as an opportunity to establish high quality business data. Whilst implementing a gold-plated solution may seem costly in the near-term, it usually outweighs the costly and resource heavy post go-live remediation projects that often follow regulatory programmes.

Implementing a robust and well tested solution will harness operational efficiencies and negate the need for tactical, temporary fixes which we find usually take longer to decommission and replace than first estimated.

The product scope for SFTR is very different from other transaction reporting regulations such as EMIR and MiFID II, therefore the front office and product teams may not be as well versed in implementing change of this scale. High importance should be placed on early engagement with a clear implementation plan. Whilst the industry awaits the one-year ticking clock to begin, firms can begin to look at three pillars that will certainly require attention: data, systems and processes.

As the product area remains largely untouched by regulatory predecessors, we’re finding business areas are unsure of the size of the implementation task and looking for the clarity that the finalised Regulatory Technical Standards (RTS) will bring. Firms should look to leverage the project resources and lessons learnt from EMIR & MiFID II implementations, as there will be overlap where systems are shared across different product trading lines, including client and product reference data systems.

Data

Much has been made of the 153 reportable fields for SFTR, however, the fields required for reporting are product and event dependent. Firms will already be capturing some of the data fields for current regulatory reporting and other business purposes; conducting a gap analysis for the data fields should be the first step to identify new data requirements or amendments to existing data. Once this has been conducted, firms will be able to identify problematic data points and begin the development work within systems and to processes.

Systems

Firms should be considering their system architecture and identifying which components will be impacted by SFTR. This will involve front office trade capture systems right through to operational and data storage systems.

Following this impact analysis, business analysts can begin the process of documenting business requirements that will feed into the solution design. The trade capture systems used for Repos, Securities Borrowing/Lending and Margin Lending are likely to be different from the ones that fell in scope for EMIR and MiFID II, therefore it’s important that these systems are updated to have the correct functionality to capture the required data before the go-live date next year.

There will also be a number of third party solutions available for data provision and/or reporting services and firms should consider what role these could play in the design of their solutions.

Processes

Although processes and procedures are a long way from being finalised and implemented, communications should begin with BAU teams to discuss the requirements for current and future processes. Ensuring the front-line staff are engaged and consulted along the project lifecycle is important to successfully implement regulatory projects.

Engagement with clients and other industry participants will also be key. Given the number of participants involved in the lifecycle of some of these transaction types, the dual-sided nature of the reporting, and potential opportunities for delegation, clear channels of communication are required from the outset.

With an estimated 12-15 months before SFTR comes into effect, firms need to start thinking about how they wish to strategically respond before time constraints result in a sub-optimal solution. Whilst other priorities may not be encouraging firms to focus on SFTR, there is plenty of work to be progressing if the go-live date is to be met without any implementation concerns. From our experience, firms that have mobilised resources and projects already, will be the ones in the strongest position to successfully implement the regulation.