SFTR Transaction Reporting – The clock is also ticking for the buy-side

With limited time before the initial go-live for SFTR transaction reporting in mid-April, the firms impacted as part of this Phase 1 (sell-side) should now be executing their testing activities.  However, given ESMA’s final reporting guidelines were only issued in early January, there’s still significant work required by some parties before readiness can be assured. The final guidance included some significant clarifications and changes covering report type sequencing and scope applicability to branches of third country entities.

As many readers will know, the reporting requirement covers repos, buy/sell back transactions, securities and commodities lending and margin lending, and includes reporting associated collateral, margin and collateral re-use.  The broad scope means there’s much work to do to ensure that the full suite of business events and associated data attributes can be tested and the strict data validation rules met in order to be able to successfully submit reports, before any subsequent matching and reconciliation can take place.

Phase 2 firms with a reporting go-live in July (Central Securities Depositories and Central Clearing Counterparties) should also be well into the delivery phase, in some cases offering services for Phase 1.  It is therefore Phase 3 in October, where buy-side firms come into scope, that represents the next real step change.

Whilst the buy-side can take advantage of industry learnings from the Phase 1 & 2 go-lives, each firm will still have its own unique set of challenges to overcome, and with that in mind, here are five key considerations for addressing SFTR for the buy-side:

1. Impact Assessment

The key first step is to confirm the scope and impacted product areas.  As SFTR spans several products, the project will need to establish working groups for all impacted stakeholders to ensure full business representation. Fund managers will need to consider if there is a reporting requirement for each of the funds that they manage.

The scoping phase should also consider impacted counterparties, the firm’s current state architecture and future growth plans before considering any solution options, to ensure the solution is future proof for any new product offerings.

2. Vendor Assessment and Solution Design

There are many industry offerings that support different aspects of the SFTR transaction reporting lifecycle, available through industry consortia, via the trade repositories themselves and from other vendors, and buy-side firms are in many cases more likely to look to make use of outsourced solutions.

A robust vendor assessment and selection process is key. Consider all potential vendor services, from pre-matching through to Trade Repository (TR) selection.  At BCS we’ve identified 13 SFTR functional components to assess vendors against and this has enabled us to evaluate combinations of vendors in order to design and select the optimum solution for an impacted firm. Market insight is key in order to be able to ensure that the most effective combination of services is chosen.

3. Delegated / Assisted Reporting Considerations

Many firms will look to their counterparts to provide delegated and/or assisted reporting services, many of who will need to develop the functionality to support reporting for Non-Financial Counterparties below the threshold for which reporting on their behalf is mandatory.

Keep in mind when voluntarily delegating such services you are delegating the responsibility, but not the accountability. There will still be a need to introduce strong post reporting controls to be able to address reporting and associated reconciliation issues. Counterparties may also use different trade repositories so in effect by delegating in this way you may also be spreading your reporting across these and increasing operational risk.  Your counterparts will also be dependent on the provision of the correct data, so many of the data sourcing challenges remain even if delegating.

A key industry challenge is how firms that delegate will manage their collateral re-use reporting given both the complexity and sensitivity of sharing these data with one or more counterparts.

4. Testing

Given the number of internal stakeholders and external vendors required for SFTR delivery, a clear and thorough testing plan is a necessity for success.

Whilst the regulation is very prescriptive in its reporting format through the use of ISO20022, the reporting scenarios and data attributes are complex and each firm must prove the robustness of its end to end solution.  With testing often compressed due to earlier project delays, testing plans and dates should be protected in order that all delivery components can be tested in full.

5. Controls Framework

Key to the long-term success and implementation of the solution is embedding the knowledge within the business functions and ensuring that the required processes and controls are fit for purpose.

Given the number of firms we’ve seen that will be utilising a pre-matching vendor service, it’s fundamental that operational teams are fully resourced and trained ahead of the regulatory go-live to maximise the benefits of this pre-reporting functionality in achieving limited reporting failures (NACKs) at the TR.

The post reporting framework will need to support the resolution of reporting failures and reconciliation breaks and should also include the definition and ingestion of Management Information (MI).  Where a vendor solution is used, the available MI should be evaluated by the business to ensure it is relevant and meaningful in order to inform business and management decisions.

Summary

At present the industry is rightly focused on delivery of the initial go-live in mid-April, however, the introduction of reporting for a large number of buy-side institutions is itself less than 8 months away.  If such firms have not commenced their SFTR projects and started to consider the components outlined above, then this really should start now before time starts to run out.

BCS combines its SFTR subject matter expertise, regulatory change experience, and operating model, process and technology change services to offer services to the buy-side covering each of these components.  Please get in touch if you’d like to discuss further.

This blog was co-authored by:

Gavin Berry – Director
Dan O’Connor – Principal Consultant