Val Wotton, DTCC Managing Director, Product Development and Strategy, Repository & Derivatives Services.
It has been just over a month since the Securities Financing Transactions Regulation (SFTR) went live for banks, alongside central counterparties and central securities depositories, and to date, it has been a successful trade reporting launch. Firms reported 1.5 million securities financing transactions with a cash value of €14.3 trillion (£12.7 trillion) in the first week alone under SFTR, according to the International Capital Market Association (ICMA).
SFTR’s smooth implementation can be attributed to preparation. Market participants not only made good use of the extra two months they were provided once the deadline moved from April to July following the emergence of Covid-19, but firms also took advantage of testing programs available to them ahead of the go-live date.
DTCC switched on user acceptance testing (UAT) for vendors in August 2019, providing 11 months to engage in UAT, and made UAT available for sell-side firms in October, nine months ahead of implementation. The pre-production process opened in March, leaving four months for clients to simulate the production environment as closely as possible. Initially, take-up was slow, but as the implementation date moved closer, the level of testing accelerated rapidly.
SFTR’s implementation also benefited from the support of the industry associations serving the securities financing market: ICMA and the International Securities Lending Association (ISLA). ICMA set up an industry-wide taskforce representing 150 firms and based on their feedback, developed best practice recommendations which facilitated consistent implementation of the regulation. In addition to this, based on lessons learned from other regulatory reporting mandates, we worked even more closely with clients to continually educate and inform them on the operational aspects of reporting. Through our testing environment, we were able to identify and address any technical issues which we could then bring to the client’s attention and resolve.
In addition to an investment in preparation and the important work of industry associations, ongoing constructive dialogue between the industry and regulators can be credited for the sell side’s successful SFTR implementation. Both the regulators and the relevant National Competent Authorities (NCAs) displayed an openness to feedback from industry associations, market participants and trade repositories. This responsiveness was evidenced when regulators delayed the Phase 1 deadline to balance the impact of the Covid-19 pandemic. Regulators also demonstrated a commitment to ongoing constructive dialogue by fulfilling ongoing industry requests for clarifications to the European Securities and Markets Authority’s (ESMA) Level 3 guidelines.
Now that SFTR has been implemented smoothly, the sell side can focus its attention on the reconciliation of transactions. Following the implementation of other regulations such as European Markets Infrastructure Regulation (EMIR), firms waited weeks to address this particular aspect of reporting because they first needed to ensure data was reported to the trade repository.
That said, as with all regulatory implementations, the benefit of hindsight brings lessons which can be learnt for future mandates. For example, some challenges occurred regarding the timely distribution of the ISO schema and guidelines, two things which should be taken into consideration during the consultation on the EMIR REFIT later this year. The original implementation date for SFTR was April 2020, however, the schema and guidelines were only finalized in January. This timeline created challenges for market participants as the schema dictates how to report and a small change to it can require a big change to the reporting process. These challenges were further compounded by a lack of clarity around the Level 3 guidelines published in January 2020, however, the ongoing dialogue with ESMA was helpful in resolving this issue.
The sell side implementation has also created a blueprint for future reporting mandates. SFTR goes live for the buy side in less than two months, time that should be spent testing, collaborating with industry bodies and trade repositories, and engaging in constructive, continuous dialogue with regulators and relevant NCAs. When the next phase of SFTR goes live, the optimal outcome is for the buy side to replicate the sell side’s success.
This article was first published in Global Investor on August 14, 2020.