Jonathan Lee, Senior Regulatory Reporting Specialist for SFTR, Kaizen Reporting.
Nine months out from Securities Financing Transactions Regulation (SFTR) go-live, there’s a wide variation in firms’ state of preparedness for the new regulation which many in the industry have described as more complex than EMIR and MiFIR put together. While a minority of firms appear to have preparations well underway, others are still very much in the early stages or have not started in earnest at all. In a recent joint webinar co-hosted by DTCC and Kaizen Reporting, “7 Steps for SFTR Implementation – A Guide to Reporting Accuracy”, we learned that 59% of respondents don't have sufficient resources and nearly 44% don't think they'll be ready to user acceptance testing (UAT) test until the last minute.
The live polling questions posed to webinar attendees indicated that many parties attempting to implement SFTR felt that they currently lacked both technical and operational resources, with Brexit making a material impact. Few parties felt they would be in a position to undergo full industry UAT testing in advance of 3 to 5 months prior to go-live, with a sizeable minority (37%) not expecting to be ready until 1 to 2 months before. More concerning is that more than 7% indicated that they did not expect to be ready to conduct any pre go-live industry UAT testing. Furthermore, 47% of respondents did not anticipate post production controls or quality assurance of SFTR reporting to extend beyond the basic trade repository (TR) validations. These results make it clear that much work remains in the testing space in both the pre- and post-SFTR implementation environments if we are not to have a crisis of data quality.
In this blog, I will answer some of the questions that were posed by webinar participants.
Go-Live Dates
We now have the four staggered go-live dates at three month intervals for banks, market infrastructures (CCPs & CSDs), buy-side and larger non-financial firms. Transactions executed on the first effective (go-live) date will be due to be reported the following day. However, with the first effective date for banks falling on the Saturday of Easter weekend, it seems the first day’s data that will be required to be reported will be either Monday, April 13, 2020 (if the Monday is not a bank holiday in your jurisdiction), else Tuesday, April 14, 2020. We should receive more concrete guidance on the start date for banks (given the Easter issue) from ESMA imminently. Market infrastructures will be due to report data for Monday, July 13, 2020, buy-side firms Monday, October 12, 2020 and larger non-financial firms on Monday, January 11, 2021.
No Low Trade Volume Exemptions
In terms of scope, there are no lower limits on the number of SFT transactions a firm enters into that need to be reported under SFTR. There is certainly scope and incentive to delegate reporting if volumes are very low but be mindful that you cannot delegate the legal responsibility for the completeness, accuracy or timeliness of SFTR reports.
Re-use, Cash Reinvestment and Funding Sources Data
We received a number of questions in relation to Re-use reporting. If positions within your firm are managed in such a way that you can calculate exactly how much of each security has been posted and consequently reused in other SFTs then you are permitted to report the exact value. In any case, securities acquired or posted in relation to trades with a European System of Central Banks (ESCB) counterparty must be excluded from your calculation (ESMA Guidance under consultation, May 23, 2019). If securities are managed in a single omnibus account regardless of their original source, then it is likely to be easier to report using the estimated measure of re-use as detailed in the FSB report ‘Transforming Shadow Banking into Resilient Market- based Finance, Non-Cash Collateral Re-Use: Measure and Metrics’ of January 25, 2017. Furthermore, cash collateral re-investment is only applicable to securities and commodities lending transactions (Official Journal of the EU, SFTR RTS & ITS, March 23, 2019).
No Mandatory Matching but Vendors Still Have a Significant Role oleMatching of transactions, contract compare or use of electronic affirmation are not mandatory in the context of SFTR but may prove a useful pre-trade repository reporting service. These services may also have a role to play in the creation, distribution and sharing of unique trade identifiers (UTI). Certain vendors are also offering report consolidation, workflow tools and reporting services. There may also be opportunities to delegate SFTR reporting (or elements of reporting) to collateral managers, agent lenders and triparty agents.
Trade Repository Validation and Single-Sided Reporting
The trade repositories will be required to validate SFTR reports (a syntax and logic check) and pair and match new transactions and activities both intra- (within their own TR) and inter-TR (between different TRs). This will not apply to single-sided reports (only subject to validation), such as when trading with a third country entity without a SFTR reporting obligation. This will also be evident when trading with a counterparty who has not yet gone live or with a UK entity in a post-Brexit Europe.
Bilateral Non-Cleared Margin Reporting
The latest ESMA guidance notes gave some clarity to the reporting requirements for non-cleared CCP margins. These should be reported as collateral updates, using collateral giver/taker, other counterparty, master agreement and collateral details. It is not necessary to populate the UTIs when these bilateral margin calls are made at the position rather than trade level.
Reporting Collateral Valuation Updates
Parties to open transactions will also be expected to provide daily collateral updates to reflect changes in collateral values. The valuation update (VALU) action type only applies to securities / commodities lending transactions but the collateral update (COLU) action should be used for other SFTs. The latest ESMA guidance states “valuation updates should be reported only when there is a change in the value of the securities.” Where price information is unavailable, then contractually agreed valuations should be used until new price information becomes available. Any changes in valuations or collateral balances should be reported.
About Jonathan Lee, Senior Regulatory Reporting Specialist for SFTR:
Jonathan is an expert in a number of regulatory regimes in the transaction reporting, trade reporting, liquidity reporting and prudential supervisory space and spearheads Kaizen’s SFTR service offering.
He has 20 years of front-to-back investment banking experience including 11 years at JP Morgan. Jonathan’s focus over the past five years has been on the emergence of new regulations covering securities financing, money market reporting and collateral reuse. In this capacity, he has been closely engaged with the FSB, ESMA, ECB and Bank of England and has been at the forefront of educational and advocacy efforts in the forthcoming Securities Financing Transaction Reporting (SFTR) regime. Jonathan is a former chair of both the ICMA ERCC SFTR Taskforce and AFME Primary Dealers Reporting group.