By Tim Keady, DTCC Chief Client Officer and Head of DTCC Solutions
Trade reporting has gotten baked into the routine for many firms across the buy- and sell-sides since over-the-counter (OTC) derivatives reporting mandates started taking effect in 2012. Firms have mastered new protocols for data collection and connected with licensed trade repositories (TRs) for report submissions. So why the surge of concern around the latest trade reporting regime? Not to oversimplify, but it comes down to one thing: data.
Europe’s Securities Financing Transactions Regulation (SFTR) imposes data requirements that are far more numerous and complex than what must be provided to TRs for derivatives transactions. And once the Central Securities Depositories Regulation’s (CSDR’s) settlement discipline regime is layered on top of SFTR, the industry’s data sourcing, enhancement and reconciliation challenges will be compounded. While the data is not difficult for TRs to process, the demands on firms are significant.
But there is some good news: synergies can be found in some emerging compliance solutions.
4 Challenges Facing Firms
Many things make SFTR vexing. Here's what I am hearing:
1. Topping the list is the quantity -- depending on transaction type, as many as 155 data fields -- and quality of data elements that must be reported and reconciled. Clients tell me this breadth of information feels overwhelming, especially since a number of them aren’t currently set up to capture all the specified data elements or capture the data in the specified way.
2. A related issue is the high level of data accuracy required to match and reconcile a large number of data elements. Reconciliation presents a struggle that has not been efficiently resolved in data reporting today. This aspect of SFTR also worries my clients.
3. Given the nature of securities financing, another difficulty firms may have with SFTR is extracting reportable data from the multiple internal silos and systems where it resides -- which in turn will complicate the task of submitting timely and accurate records to a TR.
4. Then add in the fact that new data, like universal transaction identifiers (UTIs), must be generated to comply with the regulation. Under SFTR, each securities financing transaction must have its own UTI and reporting parties must use legal entity identifiers (LEIs) to identify their counterparties, agent lenders, central securities depositories (CSDs), central counterparties (CCPs) and other entities involved in the transaction. Please note that ESMA is allowing a period of up to twelve months starting from the July 13 implementation date during which the reports without the LEI of third-country issuers of securities which are lent, borrowed or provided as collateral in an SFT will be accepted.
Bottom line: SFTR’s heavy data demands will translate into lots of pre-reporting and reconciliation work by affected firms.
What’s the Best Solution?
Unfortunately, many firms lack the in-house systems (or the resources to build them) that can tackle SFTR’s new and unique data challenges in a streamlined, automated way. Even for large, well-equipped dealers, managing SFTR compliance is difficult.
Fortunately, vendors have responded to demand and created solutions to deliver the key compliance features and capabilities firms need.
On the front end, before firms submit transactions to a TR: UTIs need to be generated; data files from myriad sources normalized, standardized and enriched to populate key fields; submissions pre-validated; and trades paired as part of SFTR reconciliation.
On the back end, any rejected submissions need to be tagged, repaired and resubmitted. And end-of-day trade reports must be reconciled with a firm’s internal books and records.
The ideal solution may be a one-stop offering, a toolbox of functions for any and all of these SFTR requirements that avoids bifurcated processes from the use of multiple vendors. As a bonus, the user could add tools that help reduce trade breaks and fails in line with CSDR’s settlement discipline rules.
For instance, firms can use the multi-function DTCC Report Hub™ for SFTR pre- and post-reporting tasks, customizing its features to meet their specific needs. For hands-on SFTR assistance, DTCC Consulting Services will soon be available to help diagnose issues, suggest opportunities to optimize a client’s trade reporting operations and recommend improvements to other areas of a client’s post-trade processes. The DTCC Report Hub™ and the DTCC Consulting Services create a neat package for addressing various reporting needs. In addition, DTCC’s Global Trade Repository service (GTR) provides a licensed trade repository for SFTR reporting.
Faced with today’s data-driven regulations, solutions providers should be scoping out new ways to maximize benefit for their clients. In DTCC’s case, we are exploring how our CTM™ platform, which already generates UTIs, can use matching to help with trade pairing for SFTR reconciliation and how our DTCC Exception Manager (DXM) could assist with exception resolution by showing SFTR transaction breaks, which can also aid in resolving trade failures.
The costs and complexity of compliance are sure to keep rising in the years ahead. Under such conditions, efficient solutions to manage data demands will be key to meeting the challenges firms are certain to face.