Things that make you go owwww
27 June 2019
SFTR experts at REGIS-TR discuss some of the less obvious pitfalls in the run up to SFTR
Image: Shutterstock
Many aspects of the Securities Financing Transaction Regulation (SFTR) workload have been obvious from the start. Others鈥攍ess obvious, possibly trickier鈥攎ay only emerge as you go along. Some of these lurking banana skins are coming up in industry working groups and in our discussions with our in-house experts, notably Clearstream product delivery guru Neil Davies. In no particular order鈥攁nd most will hopefully be resolved before reporting starts鈥攖hese are a handful of the potential headaches.
Backloading
Backloading, as of course, you know, is the requirement to report outstanding SFTs traded before going live. If you go with level 2 approach, you don鈥檛 report your the open-ended transactions on the first day, but hang on to them until 180 days after your start date. From that point, you have a maximum of ten days to submit the ones that are still open.
So far, so鈥攔elatively鈥攕traightforward. If you鈥檙e a bank or investment firm in the first wave of reporting, this means constantly updating any SFT with the slightest likelihood of still being live on 8 October 2020. You then have until 18 October鈥攁 Sunday鈥攖o submit them to your TR. Bear in mind, however, that the execution timestamps on those trades might still have to be within one hour of the stamps on the other legs. And what about the other reconcilable fields? Also, 12 October is the first reporting date for funds. Your first dual-sided reporting with fund counterparty newbies comes bang in the middle of the unique trade identifier (UTI)-riddled runup to your backloading deadline.
There鈥檚 another potential issue here, too. Net exposure managed collateral updates and reuse are reported daily to the TR. Fine, except what happens if some of the trades to which the collateral is allocated are waiting to be backloaded? They鈥檒l be invisible. Same goes for reuse data reporting.
UTI sharing
The UTI issue is sticky anyway, but once it鈥檚 decided which counterparty creates it, how do they communicate it to the other one? All the main vendor solutions can generate a UTI鈥攇reat if both parties use the same vendor, but not if they don鈥檛. There needs to be some quick, efficient and inexpensive system to deal with this鈥攁 market utility?鈥攁nd so far, there isn鈥檛 one.
Agent lender data sharing
The US Risk Management Association has said something rather interesting about agent lending and unintended consequences. If an agent lender brokers a trade between, say, a borrower in the scope of SFTR and an out-of-scope beneficial owner鈥攐r vice-versa鈥攖he in-scope party must rely on that agent lender for most of its reporting data. Fine, and they are preparing SFTR solutions for this, but it鈥檚 a huge obligation, especially for those outside the EU. If agent lenders are not fully geared up for SFTR reporting needs, could there be a migration away from the EU?
What time is it?
This might sound too obvious to even mention, but we鈥檝e heard that one of the biggest issues with transaction reporting has been people not figuring out the correct times, and possibly even the days. Think execution timestamps, reporting in UTC, the international dateline, different bank holidays.
Morphing regulation
The European Securities and Markets Authority鈥檚 (ESMA) Level 3s鈥攇uidelines and new validation rules鈥攚ere published at the end of May, with a two-month consultation period to follow. Watch out for the fine-tuning; the final clarifications aren鈥檛 due till Q4 and could have a very material impact on what is being built currently. The whole industry could feel the effect.
Phased roll-out
First, there is the reporting go-live programme, with new groups of institution coming on board at three-month intervals. Backloading comes later, also at three-month intervals, and this will mean clashes, first in October 2020 (reporting go-live for funds/backloading for banks and investment firms) and then in January 2021鈥攔eporting go-live for non-financial counterparties (NFCs) and backloading for central securities depositories (CSDs) and central counterparties (CCPs). On top of this, the number of reconcilable fields will be increased periodically until January 2023.
Phasing makes sense for many reasons, but it means that nothing will be quite stable for the first two years, with counterparties all at different stages and everyone dealing with across-the-board changes at the same time.
Reuse data reporting
Even if you鈥檙e delegating all your main trade and collateral reporting, keep an eye out where reuse data reporting is concerned. You will need to provide an overview of all your SFT-based collateral reuse activity鈥攅ven from across product lines鈥攁nd this is very hard for someone else to do for you. It looks like most institutions will need to do their own reuse reporting.
The ISO XML
XML is a language with strict syntactical rules, and considerably more complex than CSV. Reporting firms that do not have staff already skilled in XML will need to set up training, and/or hire experienced analysts and programmers, and get third-party software tools for conversion, analysis and testing (the ISO 20022 website is the best starting point).
Booking model
For dual-sided reporting, both counterparties need to book trades and lifecycle events the same way to avoid reconciliation breaks. Corporate actions could be a minefield鈥攎any institutions will be using different legacy platforms to manage their SFT activity, and trade modifications made as a result of a corporate action will simply not get matched unless the parties can figure out some sort of workable system. On the bright side, the ESMA level 3s have gone some way towards clarifying the great actual-or-contractual reporting model debate.
In fact, Neil Davies thinks the booking model could prove the worst headache of the lot: 鈥淚t鈥檒l be interesting to see how well the industry adapts their booking and reporting models to the myriad of guidelines, best-practice papers and Q&As still coming out, and whether there鈥檒l be enough detail even in all these to cover the full complexity of the SFT business.鈥�
Target operating model
There鈥檚 getting ready and then there鈥檚 the afterlife. After going live, there鈥檚 overseeing your reporting, finding and resolving reconciliation breaks鈥攈ave you considered the differences between yours and your counterparties鈥� operating models?鈥攁nd generally keeping up. Issues will be how many staff, what level of knowledge do they need, when and how to start training, what facilities you will use for monitoring鈥攜our TR鈥檚 dashboard? your vendor鈥檚? Do you use the vendor鈥檚 pre-TR reconciliation? There will be a lot of this stuff. Work out as much of it as possible during planning and testing.
Here to help
All in all, it does make sense to use a trade repository that knows and understands the market. This applies regardless of your reporting model; full or partial outsourcing, via a vendor, direct reporting to the TR or all three. REGIS-TR has unrivalled access to in-house securities lending, repo and collateral management expertise. Clearstream, one of our parent companies, acts as principal in securities financing transactions and as a triparty agent offering repo, securities lending, collateral management services and CCP margining, while our parent company groups include Eurex Repo and BME Clearing Repo. REGIS-TR is the trade repository for our group entities and their clients, and for the flows from group entities offering delegated reporting services.
For clients, this has practical benefits; we understand the market, the regulations鈥攚e have been involved in the consultation process throughout鈥攁nd the implications for both firm and TR. This is reflected in our solution design and our day-to-day services. Our pre-user acceptance testing (UAT) SFTR environment is open for firms to test their XML ISO 20022 messages against the latest ISO schemas. We plan to extend the testing availability in July to include account opening, data processing, intraday (same-day response messages) and web searches and will follow this with reconciliation testing in August and finally the end of day reports and public data in September. These testing facilities are open to our clients and to other firms looking to test our solutions. Our account model is highly flexible. As an example, clients that outsource their SFT submissions through our vendor partners or other entities can also open an account for reporting on their own behalf, which will give them full feedback and reporting on both their direct and their delegated SFT submissions. There is also a low charge non-reporting option offering read-only access to this data.
Our support network, which is free of charge to our clients, offers fluency in all the main European languages in addition to several others. Our expert client services team has in-depth knowledge of the regulation and our solutions, with a response time averaging three hours. We work with our clients if an issue proves complex, constantly stress-test our systems and contact a client directly if our monitoring tools detect an unexpected change in reporting patterns. Our relationship managers, who can be contacted directly for assistance with all aspects of our regulatory services, hold regular user groups throughout Europe to discuss current issues and regulatory developments.
REGIS-TR will continue to support the industry in the runup to SFTR. We are working with our partner Market FinReg to provide detailed SFTR training and insight, and details of our coming SFTR Webinar, implementation groups and other information will be made available on our website.
Backloading
Backloading, as of course, you know, is the requirement to report outstanding SFTs traded before going live. If you go with level 2 approach, you don鈥檛 report your the open-ended transactions on the first day, but hang on to them until 180 days after your start date. From that point, you have a maximum of ten days to submit the ones that are still open.
So far, so鈥攔elatively鈥攕traightforward. If you鈥檙e a bank or investment firm in the first wave of reporting, this means constantly updating any SFT with the slightest likelihood of still being live on 8 October 2020. You then have until 18 October鈥攁 Sunday鈥攖o submit them to your TR. Bear in mind, however, that the execution timestamps on those trades might still have to be within one hour of the stamps on the other legs. And what about the other reconcilable fields? Also, 12 October is the first reporting date for funds. Your first dual-sided reporting with fund counterparty newbies comes bang in the middle of the unique trade identifier (UTI)-riddled runup to your backloading deadline.
There鈥檚 another potential issue here, too. Net exposure managed collateral updates and reuse are reported daily to the TR. Fine, except what happens if some of the trades to which the collateral is allocated are waiting to be backloaded? They鈥檒l be invisible. Same goes for reuse data reporting.
UTI sharing
The UTI issue is sticky anyway, but once it鈥檚 decided which counterparty creates it, how do they communicate it to the other one? All the main vendor solutions can generate a UTI鈥攇reat if both parties use the same vendor, but not if they don鈥檛. There needs to be some quick, efficient and inexpensive system to deal with this鈥攁 market utility?鈥攁nd so far, there isn鈥檛 one.
Agent lender data sharing
The US Risk Management Association has said something rather interesting about agent lending and unintended consequences. If an agent lender brokers a trade between, say, a borrower in the scope of SFTR and an out-of-scope beneficial owner鈥攐r vice-versa鈥攖he in-scope party must rely on that agent lender for most of its reporting data. Fine, and they are preparing SFTR solutions for this, but it鈥檚 a huge obligation, especially for those outside the EU. If agent lenders are not fully geared up for SFTR reporting needs, could there be a migration away from the EU?
What time is it?
This might sound too obvious to even mention, but we鈥檝e heard that one of the biggest issues with transaction reporting has been people not figuring out the correct times, and possibly even the days. Think execution timestamps, reporting in UTC, the international dateline, different bank holidays.
Morphing regulation
The European Securities and Markets Authority鈥檚 (ESMA) Level 3s鈥攇uidelines and new validation rules鈥攚ere published at the end of May, with a two-month consultation period to follow. Watch out for the fine-tuning; the final clarifications aren鈥檛 due till Q4 and could have a very material impact on what is being built currently. The whole industry could feel the effect.
Phased roll-out
First, there is the reporting go-live programme, with new groups of institution coming on board at three-month intervals. Backloading comes later, also at three-month intervals, and this will mean clashes, first in October 2020 (reporting go-live for funds/backloading for banks and investment firms) and then in January 2021鈥攔eporting go-live for non-financial counterparties (NFCs) and backloading for central securities depositories (CSDs) and central counterparties (CCPs). On top of this, the number of reconcilable fields will be increased periodically until January 2023.
Phasing makes sense for many reasons, but it means that nothing will be quite stable for the first two years, with counterparties all at different stages and everyone dealing with across-the-board changes at the same time.
Reuse data reporting
Even if you鈥檙e delegating all your main trade and collateral reporting, keep an eye out where reuse data reporting is concerned. You will need to provide an overview of all your SFT-based collateral reuse activity鈥攅ven from across product lines鈥攁nd this is very hard for someone else to do for you. It looks like most institutions will need to do their own reuse reporting.
The ISO XML
XML is a language with strict syntactical rules, and considerably more complex than CSV. Reporting firms that do not have staff already skilled in XML will need to set up training, and/or hire experienced analysts and programmers, and get third-party software tools for conversion, analysis and testing (the ISO 20022 website is the best starting point).
Booking model
For dual-sided reporting, both counterparties need to book trades and lifecycle events the same way to avoid reconciliation breaks. Corporate actions could be a minefield鈥攎any institutions will be using different legacy platforms to manage their SFT activity, and trade modifications made as a result of a corporate action will simply not get matched unless the parties can figure out some sort of workable system. On the bright side, the ESMA level 3s have gone some way towards clarifying the great actual-or-contractual reporting model debate.
In fact, Neil Davies thinks the booking model could prove the worst headache of the lot: 鈥淚t鈥檒l be interesting to see how well the industry adapts their booking and reporting models to the myriad of guidelines, best-practice papers and Q&As still coming out, and whether there鈥檒l be enough detail even in all these to cover the full complexity of the SFT business.鈥�
Target operating model
There鈥檚 getting ready and then there鈥檚 the afterlife. After going live, there鈥檚 overseeing your reporting, finding and resolving reconciliation breaks鈥攈ave you considered the differences between yours and your counterparties鈥� operating models?鈥攁nd generally keeping up. Issues will be how many staff, what level of knowledge do they need, when and how to start training, what facilities you will use for monitoring鈥攜our TR鈥檚 dashboard? your vendor鈥檚? Do you use the vendor鈥檚 pre-TR reconciliation? There will be a lot of this stuff. Work out as much of it as possible during planning and testing.
Here to help
All in all, it does make sense to use a trade repository that knows and understands the market. This applies regardless of your reporting model; full or partial outsourcing, via a vendor, direct reporting to the TR or all three. REGIS-TR has unrivalled access to in-house securities lending, repo and collateral management expertise. Clearstream, one of our parent companies, acts as principal in securities financing transactions and as a triparty agent offering repo, securities lending, collateral management services and CCP margining, while our parent company groups include Eurex Repo and BME Clearing Repo. REGIS-TR is the trade repository for our group entities and their clients, and for the flows from group entities offering delegated reporting services.
For clients, this has practical benefits; we understand the market, the regulations鈥攚e have been involved in the consultation process throughout鈥攁nd the implications for both firm and TR. This is reflected in our solution design and our day-to-day services. Our pre-user acceptance testing (UAT) SFTR environment is open for firms to test their XML ISO 20022 messages against the latest ISO schemas. We plan to extend the testing availability in July to include account opening, data processing, intraday (same-day response messages) and web searches and will follow this with reconciliation testing in August and finally the end of day reports and public data in September. These testing facilities are open to our clients and to other firms looking to test our solutions. Our account model is highly flexible. As an example, clients that outsource their SFT submissions through our vendor partners or other entities can also open an account for reporting on their own behalf, which will give them full feedback and reporting on both their direct and their delegated SFT submissions. There is also a low charge non-reporting option offering read-only access to this data.
Our support network, which is free of charge to our clients, offers fluency in all the main European languages in addition to several others. Our expert client services team has in-depth knowledge of the regulation and our solutions, with a response time averaging three hours. We work with our clients if an issue proves complex, constantly stress-test our systems and contact a client directly if our monitoring tools detect an unexpected change in reporting patterns. Our relationship managers, who can be contacted directly for assistance with all aspects of our regulatory services, hold regular user groups throughout Europe to discuss current issues and regulatory developments.
REGIS-TR will continue to support the industry in the runup to SFTR. We are working with our partner Market FinReg to provide detailed SFTR training and insight, and details of our coming SFTR Webinar, implementation groups and other information will be made available on our website.
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