There are growing concerns about the health of the European repo market. Latest signs of stress in the market materialised around year-end 2016, which saw significant volatility and dislocations with banks effectively closing their books for repo business. A recent ICMA report assessed the reasons for these events and not surprisingly found regulation among the key contributing factors.
However, it is not only participants in repo trades, both selland buy-side, who are feeling the pressure from regulation. The repo back office is facing important challenges too. Most importantly, the push from regulators to shed light on the so-called shadow banking system has led to an increased focus on securities financing transactions (SFTs), including repo and securities lending.
In Europe, this resulted in the adoption of the EU SFT Regulation (SFTR) which, among other things, is set to introduce extensive regulatory reporting rules. While the law itself entered into force in early 2016, the details of the reporting rules are still being hammered out by ESMA, the EU securities authority. ESMA’s final technical proposals are expected to be submitted to the Commission by the end of March.
What is already clear is that successful implementation will require banks and all other users of the European repo market to rethink the way repos are processed. According to the latest ESMA proposals, market participants will need to report over 70 data fields on each of their repo trades. This would cover information on the counterparty, the details of the loan as well as extensive information on the collateral component.
On top of this there will be additional fields related to the reporting of margining and collateral re-use, a particularly controversial element of the regime. In line with the reporting framework for derivatives introduced by EMIR, the SFTR requires double-sided reporting. Both reports have to be submitted to specifically authorised trade repositories (TRs), which are expected to pair and match them, both intra- and across TRs. regulators expect most of the 70-odd fields to match with only very limited tolerance allowed. There are doubts whether this is a realistic approach given that firms themselves currently only capture a small proportion of the data fields required by the SFTR.
Lessons from EMIR
The experience with EMIR is not encouraging. Matching rates have been dismal from the start and have in many scenarios still not reached meaningful levels. SFTR includes some improvements over EMIR, in particular related to the standardised ISO20022 format or additional guidance on unique trade identifiers. However, the implementation challenges remain substantial and the time until expected go-live of the reporting, in late 2018, is limited.
Reducing the number of both reporting and matching fields, at least at the outset, would help. This could be done for instance if the rules would leave it to TRs or regulators to derive parts of the information from available central sources for static data, e.g. using reported ISIN codes to retrieve information related to securities collateral. Not only would this lower the implementation burden for firms, but it would also reduce the scope for data inconsistencies and thus make it easier for regulators to use the date for supervisory purposes. In its latest consultation response to ESMA, the ICMA ERCC has made a number of concrete proposals to achieve this.
Another hope lies with third-party vendors. Some solutions are starting to emerge and coalitions to form. This includes platforms for the automatic matching and affirmation of repo trades prior to reporting, but also more comprehensive frontto- back solutions that help to enrich and complete reports based on static data sources. Whether these can be translated into viable products that can be delivered in time for the SFTR go-live remains to be seen. Close collaboration between the industry and the relevant vendors will certainly be a critical success factor.
There is a chance that the regulatory pressure in relation to reporting can be ultimately translated into a more efficient and automated post-trade process for repo. However, it currently seems unlikely that this will be a much shorter and less rocky road than the one taken under EMIR.
Alexander Westphal - director, market practice and regulatory policy, at the International Capital Market Association (ICMA)