SFTR: The new kid on the block

Looking back at the past six months in the regulatory space, significant challenges have been overcome by investment managers. In November 2017, we saw a successful go live of the latest update to the European Market Infrastructure Regulation (EMIR) – the so called RTS Update – changing the way derivatives trades need to be reported. After that, the market was focused on the challenge of the Market in Financial Instruments Directive (MiFID II) in January 2018 and just recently the implementation of the General Data Protection Regulation (GDPR) on May 25^th. However, regulators are already working on the next steps, be it with new regulations or updates to existing ones.

One of the new regulations currently stirring up the market is the Securities Financing Transaction Regulation (SFTR), which intends to create transparency in the securities financing markets. This will allow regulators to assess (systemic) risk arising in “shadow banking” and thus increase the stability of the financial system. Through the borrowing and lending of securities and commodities and related collateral to be exchanged and reused, complex chains of risk passed from one participant to another can arise, over which the regulators currently have no transparency.

SFTR consists of two main parts. One, that is already in force, is the transparency obligation where funds must publish certain key identifiers on SFTs and collateral in their publications (annual reports etc.). The second part, on which SimCorp is currently working, regulates the reporting of SFTs, i.e. securities and commodities lending and borrowing, repurchase contracts and margin lending and borrowing. In broad terms, the reports will consist of three aspects:

• The trade information of new, changed and terminated SFTs including their involved parties, underlying information and how they are collateralized (ESMA tables 1 and 2)
• Collateral information on a granular level, stating the balances of posted and received margins (ESMA table 3)
• Information on reused collateral (ESMA table 4)

Expected requirements from SFTR

Similar to EMIR, the report needs to be submitted to a Trade Repository (TR) on the day following execution, modification, or termination of the contract, with an agreed trade identifier (UTI). The reporting is dual-sided, i.e. both counterparties to the trade need to report the approximately 150 fields related to the trade. About a third of them must match with the counterparties’ submission and hence reconciliation of the data and dispute management will be important. The scope of the regulation is broad, it applies to all SFTs entered into by an EU counterparty and EU branches of non-EU counterparties, the only exemption are trades with members of the European System of Central Banks (ESCB). Currently, we are awaiting final publication of the regulatory technical standards which are rumored to be published in the official journal of the EU in Q3 2018.

Twelve months later, the go live of the reporting requirements is expected for the first group of parties, i.e. in Q3 2019 for investment firms and credit institutions. Following them three months later are Central Counterparties (CCPs) and Central Securities Depositaries (CSDs). Again, three months later, Funds Management companies of UCITS and AIFMD funds and insurance firms need to start reporting, followed again three months later by NFCs and all “other” market participants. This timeline gives the market about 15 months until go live of the first phase, which is a tight deadline, given the complexity of the report and the vast amount of data needed.

The four tables outlined by ESMA consist of roughly 150 data fields that include identification on

• the parties involved in the trades, identified with Legal Entity Identifiers (LEIs), for example the buyer and seller, the CCP, the Agent and others
• contract information like the unique trade identifier, the lent or borrowed security or commodity, the agreed price and its market value
• collateral information related to the specific SFT and/or on collateral pool level
• information on reuse of collateral

With highly fragmented data in the market, especially where agents are involved in the day to day operations on the collateral side, the gathering of all relevant data within the tight reporting deadline (t+1) will be one of the key challenges. However, SFTR continues to employ identifiers like LEI and UTI that have become market standards through EMIR and also MiFID II. Firms with established data management processes to support these regulations will be able to leverage them for SFTR as well.

SimCorp’s Regulatory Center of Excellence is already deep in analysis of currently available information and prototyping of a solution. It will be designed with an intelligent data mart at its core where all required data from the relevant business areas within SimCorp’s integrated investment management software is combined and stored in the reporting format. Some SFTR reporting fields can’t just be mapped to existing data and hence this process will apply specific business logic to enrich and derive these fields.

Through connectivity to the Trade Repositories the data will be submitted, and the responses stored in the data mart. In close collaboration with market leading Trade Repositories DTCC and REGIS-TR, who have signaled to be applying as TRs under SFTR, setups are being designed and key fields discussed. It is recommended that affected firms start looking into the topic as soon as possible, to determine if they are affected and if so whether they are in possession of all the data needed for a smooth reporting start. Hence, a first short assessment whether you are affected or not is advised. A few key questions that may help in determining the impact of SFTR for your firm are:

• Are an EU firm or a non-EU firm that trades through an EU branch?
• Do you trade in products covered by SFTR (Securities and commodities lending and borrowing, Repo, Buy-Sell back, Sell-buy back, Margin lending)?

If you answer yes to both questions, chances are you will have to report. The earlier you start preparing, the better. On that note, please feel free to contact SimCorp early in the process to benefit from our experience in delivering transaction reporting solutions and to tap into a strong network of affected clients.

If you feel like reading the regulation itself, you can read it here.