SFTR Reporting: New EU Securities Finance Regulation for Investment Managers

//SFTR Reporting: New EU Securities Finance Regulation for Investment Managers

SFTR Reporting: New EU Securities Finance Regulation for Investment Managers

That’s right – another far-reaching, operationally-challenging European Union regulatory initiative is coming down the pike and is expected to go live in mid-2019.

The Securities Finance Transaction Regulation (SFTR) will introduce new reporting obligations on securities lending, repo, sell/buy-back and margin lending transactions. The goal is familiar: to enhance transparency and limit risk, in this case from non-bank alternative credit provision.

As with so many post-financial crisis regulations, the SFTR will have a broad reach, similar to GDPR, as our previous blog stated.

The new rules cover securities finance transactions (SFTs) conducted by any firm established in the EU, which includes non-EU branches of EU firms, and EU branches of third country-based organizations. However, trades with non-European Economic Area counter-parties do not have to be reported.

Since most SFTs are bespoke, collecting all the data on each transaction’s attributes, populating the fields and reporting in time will be another testing challenge for data and operations teams at affected buy-side firms.

SFTR Reporting Obligations for Investment Managers

SFTR reporting is based on components of the European Market Infrastructure Regulation (EMIR) and other EU-wide reporting regimes, in an effort to align reporting standards where possible.

The SFTR will require market participants to report details of their securities financing transactions to an approved EU trade repository. These details will include:

  • Relevant terms of the repo, stock or margin loan.
  • Composition of the collateral.
  • Whether the collateral is available for reuse or has been reused.
  • Substitution of collateral at the end of the day.
  • Applying haircuts.

As with EMIR, SFTR includes two-sided reporting, with both counter-parties having to report the details of any lifecycle event on a T+1 basis (although in trades with small non-financial counter-parties, the financial counter-party has to report for both sides).

Delegated reporting is also permitted, allowing investment managers to use a counter-party or third-party reporting service.

Challenges for Buy-Side Firms in Complying

Complying will require firms to submit complete trading data into the relevant trade repository within tight timeframes. Data availability and integrity are therefore key.

And it is no small ask.

The transaction counter-parties will need to provide trade and position data across 153 reportable fields (99 on loans and collateral, 20 for margin lending, 18 for counterparties and 16 on collateral re-use).

Counter-parties must be identified with a Legal Entity Identifier (LEI), and each will need to generate Unique Trade Identifiers (UTIs) for all reported trades. Both parties will have to use the correct UTIs and LEIs on the trade as they must match, even if you and your counterparty report to a different trade repository. Data can only be submitted to the repositories in ISO 20022 XML format.

Collating the necessary data adds to the challenge, since the industry is highly intermediated, transactions are over-the-counter, and the trade lifecycle is typically manually intensive. In many cases, the counterparties don’t treat or account for the transaction attributes in a consistent way, so the data will need to be normalized, enriched and validated before it can be submitted.

According to a recent article by enterprise data software and services company Gresham Tech, likely problem areas include:

Counter-party data

Timely access to and management of baseline information on SFT type, broker and maturity, or advanced data such as securities (re)usage and linkages between loans and collateral “is an immense undertaking.”

Collateralization complexities

Securities lending terms vary depending on the amount and quality of collateral required, while collateral returns may not exactly match the initial outflow. Harmonizing this data “will be a significant manual undertaking for large beneficial owners, particularly those using multiple broker-dealers or custodians.”

Reconciliation discrepancies

Once the counter-parties submit their reports, the data is matched at the trade repositories. Discrepancies are inevitable, so reporters will need strong auditing capabilities, data lineage and metadata references as part of their SFTR solution.

Given the reconciliation problems and costs that may result, lenders and borrowers may opt to avoid transacting with counter-parties with poor reporting processes.

In-House or Third-Party Reporting

Handling SFTR compliance internally will require a meaningful investment to collect, manage and report the data.

Alternatively, buy-side firms may opt to delegate their reporting, either to their agency lenders/brokers or a third-party provider. Some third parties will offer a full end-to-end service. Others will prepare the data records, so you can send them on to the repository.

As trade repository REGIS-TR notes, in large part the choice comes down to:

  • Whether your own systems can generate the necessary data points within the reporting deadline – in which case the workflow simplicity and consolidated data views offered by a direct relationship with a trade repository may be preferable.
  • If you need help generating the required data, a third-party or counter-party reporting option may be more efficient.

Either way, the timeliness, quality and accuracy of the reports will remain your responsibility. So make sure you’re ready for when the regulation goes live.

By |2018-09-17T19:41:07+00:00May 29th, 2018|Compliance|0 Comments