Securities finance firms face yet another hefty compliance burden in the shape of the Securities Financing Transactions Regulation (SFTR). The legislation is the EU’s attempt to gain a comprehensive overview securities financing transactions (SFTs) – repos, stock loans, margin trading etc – in order to identify and monitor potential financial stability risks.
Firstly, fund managers must disclose their policy in regard to the use of SFTs to investors in pre-investment documentation and ongoing reports. Collateral re-use, the second pillar of SFTR, requires all parties that accept collateral to inform their counterparties of the risks involved in entering into a title transfer arrangement or granting a right to reuse collateral under a security arrangement.
The third and most burdensome element of SFTR involves trade reporting. This is expected to follow the same structure as is already used for derivatives transaction reporting under EMIR. At a minimum, the data captured must include the details of the parties involved in a trade, principal amount, currency, collateral assets, repo rate, lending fee, margin lending rate, haircut and maturity date.
The information will then be sent to a trade repository, giving regulators a clearer view of the market. Recording the data accurately and efficiently is no small task considering the variety of counterparties, trade structures, bilateral relationships and global nature of the securities finance business.
As a result many securities finance service providers, such as Pirum, IHS Markit and AxiomSL, are building solutions to help reduce the workload for clients. EquiLend is another firm positioning ahead of the reporting requirement deadlines due in 2018. The trading platform, owned by a group of major securities finance market participants including BlackRock, State Street and Goldman Sachs, already collects vast amounts of relevant trade data through its DataLend business and recently detailed plans to limit the SFTR workload for its lending and borrowing clients.
“EquiLend’s operating model, market ownership, trading platform and real-time comparison service are perfectly aligned to support SFTR requirements,” Iain MacKay, product owner for EquiLend’s post-trade services, explained to Global Investor/ISF. “In many ways our owners expect us to offer a market utility solution.”
The company’s thoughts on developing a solution have been centered on delivering a compact front-to-back, low-touch model for our clients. After analysing the SFTR requirements, MacKay and his team believe that they have identified a solution that allows clients to leverage their existing EquiLend connections, thereby reducing the complexity to connect.
“We also believe that we have a unique solution with our centralized trading platform (NGT), which allows for the creation of a unique transaction identifier (UTI) and matching for both sides of the trade to be completed at the earliest entry point of trade or during the post-trade comparison process. It also brings securities finance transactions out of the shadows and creates the transparency and standardization that the regulator is looking for.”
MacKay added that his conversations with existing trade repositories have identified a two-tiered process with EMIR reporting. “The optimal solution with the highest success rate when reported by the TR is where the trade is matched at point of trade through a centrally traded platform. A fragmented process only serves to increase the number of discrepancies, which ultimately will be costly for clients in terms of human capital to resolve the breaks and potentially in fines.”
MacKay is certain that a fragmented solution is of no benefit to the market. His conversations with clients suggest they are looking for a complete front-to-back, single-provider model.
The house view at EquiLend and indeed among the majority of European securities finance participants, is that SFTR is probably the biggest change for the European industry in years. However, while there are certainly challenges to setting up for SFTR, EquiLend’s experts believe there are also many opportunities with this regulation.
“Firstly, it provides the transparency the regulator, and ultimately the market, is looking for. Secondly, to accommodate the requirements of SFTR, many processes will need to be standardized and automated. This will reduce processing costs and external vendor post-trade costs,” MacKay explained. He also expects some version of standardization of SFTR will be implemented globally. However, initial areas that are likely to see global standardization are with legal entity identifiers (LEI), which MacKay expects will be used more broadly.
Market experts will meet on Monday, 12 December at EquiLend's London office to discuss SFTR and the future impact for the market.