Following the financial crisis, both securities lending and repurchase transactions came under increased scrutiny as they were perceived to have contributed to the build-up of hidden leverage in the market. Regulators sought to introduce Securities Financing Transaction Regulation (SFTR), covering three key requirements: transaction reporting, disclosure obligations and collateral reuse obligations. SFTR is a sweeping mandatory change for the securities financing industry and is part of a wider initiative on shadow banking, with the aim of improving transparency and monitoring in securities financing transactions (SFTs).
What are SFTs?
SFTs are transactions where securities are used to borrow cash, or vice versa. They include repurchase agreements (repos), securities lending activities and sell/buy-back transactions. In each type of transaction, ownership of securities is exchanged temporarily for cash. Once an SFT is concluded, the change of ownership reverts and both parties are left with their original holding, plus or minus a small fee depending on the purpose of the transaction.
Reporting go-live will be phased in over a transitional period, with the first go-live for investment firms and credit institutions on 11th April 2020. Given the regulatory timelines, organisations, particularly credit institutions and investment firms must use the next few months to define the roadmap, and work towards having the correct operating model in place to ensure they are set-up for the reporting go-live.
- Q2 2020 (11th April 2020)– Credit Institutions and Investment Firms
- Q3 2020 (11th July 2020)– Central Counterparties (CCPs) and Central Securities Depositories (CSDs)
- Q4 2020 (11th October 2020) – Other FCs including Pension Funds and UCITS
- Q1 2021 (11th January 2020) – Non-Financial Counterparties (NFCs)
Reporting Under SFTR
SFTR applies to the following:
i) counterparties established in the EU, and all branches of those entities
ii) European branches of non-European entities
iii) Financial and non-financial firms are required to report
Reporting is dual sided, and both parties (if in scope) are accountable for reporting, though responsibility for reporting may be delegated to a third party. Delegate reporting is mandatory for financial counterparties, if the other counterparty is a small non-financial counterparty (NFC-) under SFTR, however this is not mandatory until January 2021. Financial Counterparties must consider this when designing their operating model from a technology, process and people perspective, as delegate reporting can create significant workload and require remediation if it is not done correctly.
All transactions must be reported to an ESMA approved repository by T+1, including the collateral if it is known at the point of trade. If collateral is not known at the point of trade, it is reported on Settlement +1.
SFTR also introduces pre-matching, where trades are matched at a platform on T0, to resolve any issues before submitting reports to the Trade Repository on T+1. It is important that Financial Counterparties capture the correct matching preference of the other counterparty, to ensure the trades are matched at the same platform.
Similarities to EMIR and MiFIR Reporting
SFTR is structurally similar to EMIR in many aspects. Firstly, both sides of the trade have to report to a recognised trade repository at T+1, there are similar counterparty classifications and requirement by counterparties to send one report containing the complete data set to ESMA. Counterparties are also required to report new, modified or terminated SFTs, and must maintain records of the transactions for at least five years following termination.
As well as having links to EMIR, SFTR is also closely linked to MiFIR reporting. SFTs are exempt from the MiFIR transaction reporting requirements as long as all transactions are reported under SFTR. However, SFTs with European System of Central Banks (ESCB) counterparties do not have an SFTR reporting requirement and therefore these will need to be reported under MiFIR.
SFTR presents several challenges that firms needs to overcome:
- Data sourcing: Under SFTR there are up to 153 reportable attributes. Not all 153 are required to be reported, some are mandatory, optional or conditional. However, it is estimated that firms may have issues sourcing up to 40% of data attributes, and therefore need to decide how to enrich the data they have available.
- Client outreach: Most firms will need to perform client outreach in order to gather the information they are missing, either for reporting purposes or to obtain the additional information needed to classify clients as in or out of scope. Client outreach exercises can be time consuming, costly and firms also need a method of consuming and storing the data once they have completed the outreach.
- UTI Generation: Firms will need to have a Unique Trade Identifier in their reports to the TR. This value will be used by the TRs to match separately received reports from each counterpart to an SFT. UTI generation should only be performed by one party to the trade, to ensure that both sides of transaction have the same UTI.
- LEI’s: Third party to trade identifiers (e.g. brokers, agent lenders, tri-party agents) will need to be on-boarded as counterparty’s and have an LEI reported under SFTR. LEI’s will also need to be stored in Front – End systems (PTSs) to ensure this is captured correctly.
- Collateral: SFTR reporting must also include any collateral linked to the SFTs. This includes the LEI of the counterparty with whom the collateral was exchanged and the master agreement under which it was agreed.
How can New Link help
As a practitioner-led consultancy with a proven track record in managing complex regulatory change programmes in the largest investment banks, New Link Consulting is uniquely placed to offer its expertise to ensure firms are able to meet the day one reporting requirements for SFTR. New Link Consulting offer a range of services, and a customised offering for each client driven by their unique requirements.
Client Outreach & Documentation
SFTR may require new client data to be captured, stored and distributed to the TR. Our consultants are able to assist with client outreach to capture the necessary data needed to meet reporting requirements.
Define the business rules to determine the eligible clients in scope client for SFTR reporting.
Assist with the design and implementation of key controls, to ensure data quality and assist with the reporting accurary.
Assist with the implementation of a data strategy for SFTR, identifying critical data elements and ensuring high levels of data quality.
Data Lineage & Data Quality
Track data and system lineage from source to end user systems and ensure that the root cause of data quality issues are documented and remediated.
Operating Model Design
Design and implement strategic Target Operating Models to help generate operational efficiencies, creating a controlled operating environment.
Deliver strategic programmes to ensure there is a model in place to support future changes to the regulation, without the technical debt on legacy systems.