SFTR Transaction Reporting – Success Story or Honeymoon Period?
Amidst the global macroeconomic issues and challenges of adapting to new ways of working during the pandemic, one good news story of the summer has been the successful go-live of transaction reporting under the Securities Financing Transactions Regulation (SFTR). With the initial phase deferred by three months from April, mid-July saw the implementation of reporting for the sell-side along with Central Securities Depositories and Central Clearing Counterparties, with the next phase for buy-side firms due to go live in mid-October.
Across the four registered Trade Repositories (TRs), it’s been reported that well over 90% of transactions have passed validation checks. That is a considerably high number for a new regulation and arguably sets SFTR on the path to being one of the smoothest regulatory implementations the industry has seen.
Here we consider what has helped SFTR transaction reporting get off to such a flying start and what further challenges lie ahead.
A regulatory re-cap
The Securities Financing Transactions Regulation is a complex piece of regulation that brings new asset classes into the transaction reporting fold, covering Repurchase Agreements (Repos), Buy/Sell Back transactions, Securities & Commodities Lending and Margin Lending. It includes reporting of associated collateral pledged by the borrower, margin placed with Central Clearing Counterparties and an estimate of collateral re-use for each instrument. This gives six report types, ten action types for these reports and an oft-quoted 153 data attributes to be considered. Importantly, as a dual-sided reporting regime, there are stringent reconciliation requirements, some that have kicked in immediately with others being introduced over time.
What has made the initial go-live a success?
Firstly, let’s consider what has gone well. From the outset, there’s been increased cross-industry preparation and collaboration in comparison to other regulations such as EMIR & MiFIR. This has manifested itself in a convergence on vendors that has enabled firms to take advantage of consolidated testing and harness the experience across the industry from their selected vendors. Industry bodies have also played a key role, leading the way with working groups and industry advice, and documenting and sharing best practice.
Beyond the cross-industry collaboration, there are also specific aspects of the regulation and vendor offerings that have assisted with project implementation. The use of ISO20022 has enabled the standardisation of data across the industry. Not only does this play a key part in the high validation acceptance rates but will also help to ensure better pairing and matching rates as the reporting evolves. Vendors also offer pre-matching, and whilst dependent on the other counterparty, can offer firms a window to fix reporting issues before they reach the TR. This is dependent on the other counterparty using the same vendor and is certainly partly why there’s been a convergence on preferred industry vendors.
And let’s not forget the role that prior experience of other regulations has played. The industry has really been able to leverage the lessons learnt over recent years from Dodd-Frank, EMIR and MiFIR.
What are the key challenges that have had to be overcome?
It’s also important to note many of the challenges that firms had to overcome in implementing SFTR.
Like many reporting regulations, the key is in identifying all the required data sources internally across your systems architecture and externally where relevant and in ensuring these provide the required data in an accurate and timely manner. This provides complexity when products are traded across multiple platforms and data is housed within several systems.
Although ISO20022 has the standardisation benefits mentioned above, XML can prove complex and requires specific knowledge and expertise in order to provide the data in line with the XML schema.
The dual-sided reporting and hence reconciliation requirement has meant that alignment has been required between counterparts, helping drive industry standardisation for the likes of booking corporate actions.
There’s also the complexity of the regulation itself, leading to a complex set of testing scenarios to cover all lifecycle events for all product types.
Reporting collateral reuse for some firms can also be a complicated process which will undoubtedly remain a challenge for the buy-side.
The immediate focus is on the next phase of the implementation. The go-live for the buy-side will not only increase the volume of reporting but importantly will increase the amount of dual-sided reporting and hence required reconciliation.
These buy-side firms should be well into final testing preparation ahead of the go-live, but each will need to consider the same set of complex reporting scenarios for products traded irrespective of their size.
Buy-side firms are also more likely to be making use of vendor offerings and/or making use of delegated reporting, which brings its own challenges in ensuring the data provided is both timely and accurate.
For smaller firms who may look to manually share UTIs this also poses risks and corresponding controls will therefore have to be designed and implemented.
What does the future hold?
Firstly, let’s not pretend there are not still issues to overcome.
With ESMA releasing updates late in the day, it is unlikely all firms will have been able to test all scenarios in time for go-live and issues could be yet to be uncovered.
Firms will also need to work through all issues associated with un-reconciled items as the focus moves to continually improving reconciliation rates, especially as the buy-side come onboard.
Firms will also need to be ready for and expect regulatory scrutiny. By all accounts with regulators also having their technology more ready for SFTR at go-live, this could arise earlier than it has for prior regulations.
SFTR Transaction Reporting is off to a fantastic start, but ultimately, it will not be measured through data validation rates. Firms will need to work to ensure all issues are overcome for their reports to reconcile with their counterparts and where breaks do occur, to ensure the controls and processes are in place to address these in the required timeframe.
BCS combines its SFTR subject matter expertise, regulatory change experience, and operating model, process and technology change services to assist firms with SFTR transaction reporting implementation and ongoing reporting health-checks. Please get in touch if you’d like to discuss further.