The introduction of Securities Financing Transaction Regulation (SFTR) in 2018 will be one of the biggest ever fundamental changes to the SFT industry, delegates heard at an EquiLend-hosted event yesterday. However, the industry is only partially prepared to provide the required data to trade repositories (TRs) by the 2018 implementation date.
The aim of SFTR, as with EMIR reporting, is to provide regulators with sufficiently high quality data to successfully identify the build-up of systemic risk. Some in the industry have criticised its approach as heavy-handed and it certainly creates a huge compliance challenge.
The second round of ESMA’s consultation closed on 30 November and it is expected that its final draft technical standards will be submitted to the European Commission in January 2017 before being finalised.
Once finalised, firms will have 12 months to comply, starting quarterly by banks and investment firms, followed by CCPs and CSDs, financial counterparties and then corporates. Therefore, the effective dates are unknown but expected to start in Q1 2018.
The panel was unanimous in expecting little or no change from the second draft text. “That has been pretty clear throughout this process. ESMA has listened and made changes where it felt they needed to be,” said Laurence Marshall, COO, EquiLend.
A poll of delegates asked how prepared their organisation was for SFTR: it found that 47% thought that more analysis was required, 45% understood the requirements but were still looking for a solution, and all of the remaining 8% was not prepared. After the event, several people confided they thought this was overly optimistic.
“The big challenge for firms is to look at how they process their business today and consider whether they can get to the required reporting through that model – I think the answer is ‘no’,” said Marshall. “There are going to have to be fundamental changes.”
The reluctance of firms to invest in a reporting solution is at least in part due to confusion about where responsibility lies.
“I do not think people are particularly clear as to the way the SFTR regulations will be finalised,” said Nick Nicholls, lead consultant, GFT UK. “There is a lot of concern about how they are going to meet those regulations. A number of clients are looking to see how work that they have done for EMIR and MIFID II might help them. There are a lot of unanswered questions that we hope to see clarified.”
Agent lenders are usually on hand to help beneficial owners achieve regulatory compliance and anecdotal evidence suggests they expect this to be the case for SFTR, despite the obligations being on the principles to those transactions.
James Day, managing director & business executive for securities finance in EMEA, BNY Mellon Markets, said: “Most clients we are talking to are looking to the agent lender to solve the problem. It they have to build their own solution, I think many will question the benefit of lending and this could impact market liquidity. The agent lender therefore needs to evaluate the business case and associated risks of being part of the solution set and price it accordingly.”
Patrick McManus, head of collateral resource management, Nomura, said his firm will be able to leverage its reporting systems developed for other products: “Our position to be able to provide such data is dependent on what we receive from the information providers, whether the lender or tri-party providers… we just need to make sure everyone else is collectively providing the same level of detail. For us, that is a concern.”
The SFTR requirements are closely aligned to those imposed on the derivatives market by EMIR. While the securities lending industry can learn lessons from its implementation it cannot expect the same leniency that ESMA provided for derivatives and it is very unlikely that the timetable will be pushed back.
EquiLend’s Marshall added: “Most regulatory teams do not have SFTR as their number one priority today – so it is a big challenge for everyone to get the resources they need. There is a huge opportunity to learn lessons from EMIR. We feel strongly that the creation of a central trade matching platform is the appropriate model in an environment where you are effectively reporting matched trades.”
“The risk for the TRs and regulators to come back and query submissions means firms could find themselves in a position where they are building out trade reporting support teams that are the size of those for EMIR – firms should really look to avoid that.”
It is unknown how lenient regulators will be regarding punishment and perhaps fines for poor submission of data. While there have been no fines under EMIR the regulators are making increasingly specific requests for data.
Mark Steadman, European head of product development at DerivSERV, DTCC, said: “From a trade repository perspective, I believe the regulators have learned a lot from their mistakes with EMIR. I do not expect the same process under EMIR. They recognised they were getting very poor quality data, which led to the level one and level two validations. Pre-reconciled or pre-matched trades will going to make things a lot easier. We see that under EMIR – you see much higher matching results.”