Simon Davies, Senior Consultant at The Field Effect
As the effective date of the European Union’s (EU’s) Securities Financing Transaction Regulation (SFTR) draws near, the need for affected firms to understand SFTR’s industry impacts and start necessary preparations to ensure compliance readiness becomes more urgent.
Scheduled to go live in Q1 of 2020, SFTR was proposed by the European Commission in January 2014 in an effort to promote greater transparency in the securities financing markets. The new regulation will require all EU firms to report their securities finance transactions (SFTs) to an approved trade repository, including repurchase agreements (repos), securities lending activities and margin financing activities.
DTCC Connection sat down with Simon Davies, Senior Consultant at The Field Effect, a boutique consultancy specializing in clearing and collateral management spanning cleared and non-cleared OTC Derivatives, Exchange Traded Derivatives and Securities Finance, to discuss how firms are being impacted by SFTR and the preparations they need to make, as well as the latest regulatory timeline. Davies is the author of the recent paper, Addressing SFTR’s Industry Impacts: The Vital Role of Trade Repositories.
Simon Davies joined The Field Effect after nearly 20 years working in investment and corporate banking, with experience in securities finance and collateral management, prime brokerage and depository banking, including process change, outsourcing, client and relationship management and business development roles. Simon has expertise in securities finance and SFTR impact analysis and solution design, OTC derivatives, collateral management and regulatory change. Prior to joining TFE, Simon worked for Morgan Stanley, Deutsche Bank and Fortis.
DC: Can you share the latest regulatory timeline for SFTR implementation?
SD: Current market expectations are that the SFTR reporting requirement will go live in Q1 2020. This will be for the first wave of firms who are required to report, with additional firm types being phased in throughout the year.
Diagram showing the expected regulatory timeline including the phases and their respective firm types.
DC: Why should firms begin preparations for SFTR compliance now if they have not done so already?
SD: SFTR affects all European market participants and there could be implications beyond the EU, which firms should carefully consider. As you can see from the regulatory timeline and given the complexity of the regulation, preparations should start as soon as possible. Firms who have begun preparations need to ramp up their efforts.
DC: SFTR will require firms to report their SFTs through an authorized trade repository (TR). Can you explain the reasoning behind this and tell us what factors should banks consider when choosing a TR for compliance?
SD: SFTR has designated TRs as essential elements of compliance by acting on behalf of firms to consume, validate and store the vast amounts of transaction data involved. By validating the content of the data reported and collected and providing appropriate data analytics, TRs enable user firms to improve the quality of their reporting and matching as well as market intelligence and risk reduction analysis.
There are a number of factors that should be considered when evaluating a TR. These include the track record of the TR, the functionality offered and the TR’s ability to handle heavy reporting volumes. Firms should also consider whether a TR can improve their breaks management and if the TR can accommodate future expansion of SFTR implementation across other jurisdictions. Firms can evaluate particular TRs using the checklist in the educational paper.
DC: What are the key industry impacts of the regulation that firms should be considering?
SD: The reporting requirement has considerable impact, with about 60% of firms’ securities finance processes affected, up to 40% of data required missing and changes required to firm's operating models and industry processes, especially around the increasing use of automation like multilateral trading facilities platforms to automate trade booking and generate universal transaction identifiers. Again, I would encourage anyone looking for more detailed explanations of these impacts to download the paper.
Liquidity and supply will also be impacted, along with an explosion in the reporting volumes compared to current trade booking levels that firms will need to consider and deal with.
Along with liquidity impacts, firms should look at the availability of collateral for re-use and the implications of enhanced regulatory disclosure for non-EU participants dealing with EU firms and if this will lead to shifts in activity.