Industry apathy remains as SFTR deadline looms
With six months to go until the reporting deadline for the EU’s Securities Financing Transactions Regulation (SFTR), there remains a worrying level of apathy and unreadiness in the industry, according to market participants.
“Industry surveys show there is a lack of preparedness in the industry and there is a worrying [amount] of organisations who will not be ready by the go-live date,” says Sunil Daswani, SFTR consultant specialist at MarketAxess.
SFTR aims to increase transparency on the use as repos and securities lending transactions, and on the risks around entering collateral arrangements.
Both financial and non-financial companies will be required to report such transactions to approved trade repositories.
The types of firms affected include banks, investment firms, CCPs, CSDs, insurance, reinsurance undertakings, pension funds, UCITs, AIFs and non-financial counterparties.
“While phase one go live implementation is from April 2020, phase two and three organisations still need to prepare if they are trading with a phase one counterparty,” adds Daswani. “These organisations will not be able to ignore preparations until their own go-live deadline.”
Saeed Patel, director of product strategy at KRM22, says: “There is a degree of apathy in the financial industry on the level and magnitude of recent regulatory change experienced. As a consequence, we believe the industry has been late in preparing for SFTR with compliance and IT resources stretched and waiting until the last minute to launch project initiatives.”
Patel finds that budgetary concerns have been placing pressure on compliance team headcounts and technology investment in recent years.
“There is no question that firms must start to prepare now to comply with the regulatory timetable for the April 2020 go-live.”
“SFTR reporting obligations add another level of complexity on transaction reporting when compared to the second Markets in Financial Instruments Directive (Mifid II), with greater level of data fields required to be reported and a new set of validation and conditional rules to comply with,” adds Patel.
Neil MacDermott, chief operating officer at EquiLend Limited, believes that issues could arise around legal entity identifiers (LEIs).
“Every instrument involved in a reportable securities finance transaction will need to feature the LEI of the issuer of the security. This applies to transactions and the associated collateral. A report will not be accepted by a trade repository if this data point is not completed. A recent analysis of all securities actively traded in the securities finance market revealed that up to 15,000 instruments do not have an LEI of issuer listed. Firms will be faced with the choice of removing these instruments from their trading and collateral sets, or risk being in breach of SFTR requirements to report those transactions.”
Daniel Percy-Hughes, director of regulatory change and compliance at Synechron, believes that the biggest challenges are likely to come from firms’ own organisational structures.
“Firms whose application stack makes it difficult to change have a higher regression risk, which will face more difficulty than those firms who are already designing and building more scalable solutions,” says Percy-Hughes. These institutions would deploy solutions such as APIs and microservices, or embrace cloud based big data technologies. “Technology, budget and culture all play a part in this,” he adds.
Unique transaction identifiers (UTI) generation and sharing is still a major hurdle that organisations should address, according to Daswani. “To satisfy the dual nature of requirements, UTIs need to be shared between counterparties.”
The challenge is to consistently report on both sides of the transaction. This means being able to not only generate and share UTIs but also accept them from a counterparty.
“There are choices to be made around best practice and organisations can choose to follow either a waterfall or bilateral agreement. Organisations need to make fast decisions here, especially for those who still need to determine what their chosen provider to assist in SFTR reporting can do for them relative to internal capabilities,” says Daswani.
Regulators will want to set an example early on in the case of non-compliance. Alejandro Perez, global head of post-trade solutions at Bloomberg, says that if we look at past regulatory deadlines such as with MiFID II, “regulators always emphasised the need to be in compliance but said they would take a practical, risk-based approach to supervision and enforcement in the early days after go live where they were sure firms had made best efforts to comply. It’s possible they will take a similar approach for SFTR, but of course this doesn’t mean firms can take a wait and see approach.
“Teething issues should also be expected. SFTR is the most complex reporting regime to date, and it’s impacting an industry where a lot of legacy systems remain. Issues surrounding key requirements, such as LEI adoption, but also industry-wide challenges around UTI generation and dissemination might complicate the task.”
Daswani adds: “For those who do not comply, there is a risk of being made an example of by the regulator and the consequent potential reputation risk. In addition, there are potentially significant costs associated with non-compliance.
“There are industry rumours that the phase one go live deadline may shift – especially given this is currently set for Easter weekend, which from experience isn’t a good time to implement, particularly from an operational perspective.” However, Daswani does believe that there may be a short period of leniency while organisations adapt and address teething issues.
For Percy Hughes, as with many other types of transaction reporting, non-compliance means that reporting is incomplete or inaccurate, rather than non-existent. “The most obvious impact to the market is that transparency is of less value than it otherwise might be, and the regulator has information of more limited quality. Firms will face ongoing reconciliation breaks, a backlog of remediation efforts and will always run the ever-present risk of fines.”