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Setting the Bar with SFTR Testing and Standardisation

By Val Wotton, DTCC Managing Director, Product Development and Strategy, Repository and Derivatives Services | November 16, 2020

It has now been three months since major sell-side participants began reporting their Securities Financing Transactions (SFTs) to trade repositories under the European Securities Financing Transactions Regulation (SFTR).

While there are some minor technical issues to iron out, by and large, implementation of SFTR for the sell-side has been a success. With the go-live of reporting for the buy-side having just begun on 12 October, the main two lessons they should learn from their dealer counterparts are the importance of testing and the significance of data standardisation.

The fact that sell-side firms spent a large amount of time testing is one of the main reasons behind successful SFTR reporting. In addition to this, a number of industry bodies and trade associations spent considerable time and effort ensuring industry collaboration in order to promote standards and best practice in helping market participants to comply with SFTR.

Due to successful testing, just days after the July go-live, firms were able to focus their attention on the reconciliation of transactions. There are two steps to reconciliation: first the transactions need to be paired, using LEIs, UTIs and Master Agreements, and then firms need to match the underlying fields. Trades are currently being paired at a rate of 70% and 40-50% from a matching perspective.

To see improvements in these rates, firms should now be turning their attention to their operational processing when it comes to dealing with issues such as breaks and unpaired or unmatched trades. Firms need to think about how these processes are going to be managed – here there are opportunities to drive efficiencies. If problems can be identified early on in the trade reporting process, then pairing and matching can be guaranteed and hence reconciliation rates improved.

For buy-side firms gearing up for reporting in October, without doubt, like the sell-side, testing is key to ensuring the successful submission of schema valid reports – not only for SFTR but for compliance with revisions to other reporting regulations which are soon to mandate the ISO 20022 schema. However, for buy-side firms there are additional complexities in their preparations for SFTR such as delegated reporting. This is where a sell-side firm reports to a trade repository on behalf of a buy-side client. An exception to this is the reporting of collateral reuse, where a financial institution reuses collateral secured in one transaction for another in order to reduce funding costs and increase liquidity. SFTR mandates the reporting of this activity; however due to issues around confidentiality, many buy-side firms are opting for inhouse reporting for this type of activity. In fact, we are seeing many buy-side firms opting for a hybrid model, where they delegate the majority of reporting, leaving just collateral reuse reporting to be carried out in-house.

Other complexities related to SFTR implementation include adherence to the ISO 20022 schema which has been mandated for reporting. All it can take is for one field to be incorrect and the report/message will be rejected as it is schema invalid. As such firms must ensure every field is completed correctly to ensure successful acknowledgement by the trade repository.

While SFTR’s ISO 20022 schema have created some teething issues, it is now being proposed as a standard for forthcoming trade reporting regulation rewrites. The Commodity Futures Trading Commission (CFTC) has recently published its re-write of derivatives regulation and stated that it will mandate ISO 20022 for reporting to swap data repositories (SDRs) when the standard is developed. Further, it is anticipated that the European Securities and Markets Authority (ESMA) will propose to introduce this schema as part of its consultation on the European Market Infrastructure Regulation (EMIR) REFIT later this year which would align to SFTR.

The success of initial SFTR implementation has proven the case for standardisation and the regulatory community is working closely to ensure that going forward firms can more easily comply with existing and future reporting regulations by using the ISO 20022 schema. Looking beyond the ISO 20022 standard, more generally, regulators in the US and Europe are working to agree on standards and the broad adoption of a common global framework for trade reporting, and we are hopeful that other jurisdictions, including Asia, will align with evolving global consensus. Not only will this reduce the cost of compliance for firms, regulators and the industry as a whole will be able to derive greater value from the reported data and the infrastructure that has been built to support trade reporting.

This article was originally published in Thomson Reuters Regulatory Intelligence.



Val Wotton Headshot
Val Wotton

DTCC Managing Director and General Manager, Institutional Trade Processing