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In a recent interview with Global Custodian, Mark Steadman, Executive Director, Repository and Derivatives Services (RDS) Product Development at DTCC looked at how phase-three of the Securities Financing Transactions Regulation (SFTR) will impact the buy-side community.

Originally published July 2020

SFTR at a Glance

SFTR phase-one was implemented simultaneously with phase-two on July 13, 2020 after a three-month delay, while buy-side firms will be primarily captured in phase-three, scheduled to take effect on October 11, 2020, followed by non-financial counterparties (NFCs) in January 2021. The regulation aims to reduce perceived shadow banking risks in the securities financing markets by imposing conditions on the reuse of financial instruments provided as collateral and requiring that managers of UCITS and alternative investment funds (AIFs) make detailed disclosures to their investors regarding their use of securities financing transactions (SFTs) and total return swaps. To provide transparency to regulators SFTR also requires both parties to a trade to report new, modified or terminated SFTs and the associated collateral to an ESMA registered or recognised trade repository (TR) on a T+1 basis.

Global Custodian: What are the biggest challenges SFTR poses to buy-side firms?

Mark Steadman: I don't think anyone would disagree that SFTR is the most complex trade reporting regime to date. SFTR requires the reporting of the underlying collateral, not just its netted value, therefore collateral reuse reporting may be difficult to delegate, and then there is the pain of sourcing the data to populate 155 fields, including a unique transaction identifier (UTI) which needs to be paired and shared. Additionally, the formatting requirements for SFTR reports submitted to TRs are strict -- they must be in ISO 20022 -- so any firm not well versed in reporting in XML will face a challenge. If that isn’t enough, repo, stock lending and margin lending are very different products with very different workflows, and each has its own industry representative body. So there's a lot to get your arms around.

GC: Tell us more about the difficulty of collateral reuse reporting for the buy-side and its implications?

MS: Collateral reuse needs to be reported at an aggregated level for each entity that reuses its collateral. As its not at a trade or counterparty to counterparty level as with all other trade reporting, and requires some sensitive information to be provided, this means delegating this to another party is going to be very difficult to do. Certain restrictions are already in place for reuse but, given the nature of reuse reporting under SFTR, this regulation may make it too onerous to bother with reuse.

GC: Presumably some buy-side firms have not yet started preparing for SFTR. Do you have advice for these firms?

MS: Many of these firms may be unfamiliar with SFTR and the regulatory expectations around it, so first they should undertake an audit. What security finance products do you trade? What products are you in scope for? Who do you trade with today? Start talking to those firms, especially if you are seeking to delegate your reporting.

Second, they can gather lots of useful information through industry bodies like the International Capital Markets Association (ICMA) and International Securities Lending Association (ISLA). Each have issued SFT reporting best practice guides.

When it comes to reporting, DTCC is enabling clients to meet their SFTR reporting obligations through our Global Trade Repository (GTR) service. GTR is the world’s largest trade repository for OTC derivatives reporting and it is entering the securities financing market as a registered TR.

With our years of experience in jurisdictions around the world, we understand clients’ top pain points around reporting and can advise on best reporting practices. We’re also committed to minimizing the client build-out effort for SFTR. To that end, we have rolled out the DTCC Report Hub® service, a suite of tools clients can use in combination with GTR to manage their pre- and post- reporting tasks.

GC: Be more specific about these pre- and post -reporting tasks and how the DTCC Report Hub works.

MS: SFTR requires extensive effort to transform and enrich trade data so that it meets stringent eligibility, completeness, accuracy and timeliness standards before it is submitted to a TR in the mandated ISO 20022 XML format and, on the back end, to reconcile reported data with firms’ internal records. Yet most firms lack efficient, rationalized in-house systems and procedures to perform this work.

We built the DTCC Report Hub to serve this unmet need, which will only keep growing as reporting mandates are extended to more jurisdictions and get more complex. In fact, we plan to adapt the service to function across products and regulatory jurisdictions.

The DTCC Report Hub leverages automation technology to translate transaction data into formats required by regulators, enrich the data using reference data sources, and find and fix errors and/or missing data before firms submit to a TR. The service also lets users compare their trading books to transactions to ensure the trade reports match.

Because users choose the features they want, the DTCC Report Hub service is a flexible toolbox for buy-side and dealer firms, small or large. It is also an efficient way for firms to allocate resources by alleviating the stress on in-house technology and staff.

For more from DTCC’s experts about how the buy-side can prepare for the compounding impact of regulations like SFTR, CSDR and UMR, read the full Global Custodian supplement here.

Learn more about our GTR service and DTCC Report Hub® service for SFTR.