Val Wotton, Managing Director, Product Development and Strategy, Derivatives and Collateral Management at DTCC.
Ten years on from the start of the global financial crisis which was marked by the collapse of Lehman Brothers, policy makers have made great strides in implementing reforms to financial markets, originally agreed by G20 jurisdictions in Pittsburgh in 2009.
Thus far in Europe, post-crisis reform has been implemented through the European Markets Infrastructure Regulation (EMIR) and the second Markets in Financial Instruments Directive (MiFID II). Further efforts to build on those reforms are now taking place through the Securities Financing Transactions Regulation (SFTR) which mandates reporting of repurchase agreements (repos), sell-buy back and buy-sell back activities; securities and commodities lending and borrowing; as well as margin lending and borrowing, to an authorized trade repository.
Looking further afield, while SFTR is a European regulation, it was implemented as a result of recommendations by the Financial Stability Board (FSB) to ensure greater transparency of the securities financing market, and as such it is likely that the regulation will be adopted across multiple G20 jurisdictions. While it remains to be seen whether the U.S. will follow suit and adopt regulations equivalent to SFTR, the regulation applies to all branches of EU entities trading European securities, wherever they are located across the globe. Accordingly, US entities may find they will need to prepare for compliance with SFTR itself in 2020.
As a result, it is essential that market participants approach compliance with SFTR from a global perspective, including selecting a trade repository that operates globally and can ensure continued servicing of its clients in the UK as well as in the Eurozone.
Looking specifically at developments in the US, the US Treasury is increasingly interested in creating greater transparency in the US repo market. In July 2018, the Treasury Department’s Office of Financial Research (OFR) published a proposed data collection of centrally cleared repo transactions, and noted that gathering this data would improve the Financial Stability Oversight Council’s (FSOC) ability to identify and monitor risks to financial stability.
While the rule proposal published in July seeks data on cleared repo transactions, the 2017 FSOC Annual Report, which was released under the current Administration, suggests that the FSOC may ultimately be interested in accessing data on securities lending more generally. The report states that, “To fill data gaps in securities financing, and in response to earlier Council encouragement, the OFR is in the process of developing a rule to collect data on repo and certain securities lending transactions”.
Regardless of jurisdiction and regulatory mandate with regards to securities financing and repo, firms operating in this particular market have more work to do in comparison to the derivatives industry when it first faced trade reporting regulation, specifically regarding data availability and the workflows that currently sit at the core of the securities finance industry. Also, market participants that are not familiar with the derivatives trade reporting regimes may not be aware that critical to the success of SFTR implementation specifically, is the ability to report in an accurate and timely manner – reporting must occur on a T+1 basis. Further, robust control frameworks are required, including control of the data reported on behalf of firms which should be reflected fully in both books and records.
In terms of the data that must be reported under SFTR, firms will first need to establish what data is required by examining workflows, ascertain how that data will be obtained and for that data which is not available, determine exactly how it will be sourced. Also required is validation of messages when accepting and storing them to ensure message completeness, as well as accuracy of data formats, including reference data validation, including Legal Entity Identifiers (LEIs), International Securities Identification Numbers (ISINs) and International Organization for Standardization (ISO) country codes.
Like regulations that have come before in Europe – such as MiFID II and EMIR – SFTR will bring greater transparency to the region’s securities financing and repo markets. While US may not yet have adopted securities financing regulations, it may only be a matter of time before US regulators, and indeed others, do so. Further, given the level of securities financing activity which takes place cross border, market participants need to approach compliance from a multi-jurisdictional standpoint. Failure to do so means that the industry will be unable to deliver on the G20’s objectives to make markets more transparent and safer for all.
This article first appeared in Markets Media on August 15, 2018.
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