Debate rises over UTI exchange connections for SFTR

The market remains at odds over the dissemination of unique transaction identifiers (UTIs) for Securities Financing Transactions Reporting (SFTR). Some banks are pushing for their counterparties to be connected to specific UTI exchange platforms to consume UTIs directly. But because of the work needed to connect, many firms are choosing not to. “With regards to …

by | February 25, 2020 | bobsguide

The market remains at odds over the dissemination of unique transaction identifiers (UTIs) for Securities Financing Transactions Reporting (SFTR).

Some banks are pushing for their counterparties to be connected to specific UTI exchange platforms to consume UTIs directly. But because of the work needed to connect, many firms are choosing not to.

“With regards to UTI exchange. This is the biggest issue bar none with SFTR as banks of all shapes and sizes simply cannot build SFTP connections for every client who wants to send UTIs then load them into their own operating model structures. It’s too labour intensive, expensive and that is where banks will have to decide as to whether it is worth continuing trading with certain clients via SFTs and as a whole,” says Colin Toye, who works on SFTR at ING Amsterdam.

SFTR is a dual sided reporting regime. To enable trade repositories to match trades from both counterparties, UTIs are paired.

On January 6, the European Securities and Markets Authority (Esma) published a final report and guidelines to clarify provisions of SFTR. The guidelines set out a flowchart to show who is responsible for UTI generation.  

However, it is unclear how the UTIs should be distributed, says Catherine Talks, SFTR product manager, UnaVista.

“Generation is one part – who is going to receive it, who is going to provide it? But, how do you generate it, how do you share it with your counterparty? These are all questions that firms are still having to work out answers for.”

There are UTI exchange platforms which will share the UTIs instantaneously after a transaction if both counterparties are connected to the system.

Dean Bruyns, senior director of product management, Broadridge says most of their clients have decided against establishing a connection to such a platform.

“While there are obvious benefits to the UTI exchange, there are also cost implications and additional exception management workflows to consider. This has proved to be a deterrent for some,” said Bruyns in an email.

“Furthermore, the market is highly fragmented, which means that usually an exchange will only help sharing UTIs across a proportion of a firm’s business, because it requires their counterparties to be on the same platform to be effective. There has been some notable work done in attempting to provide access to non-clients to help broaden the reach, but without interoperability between the UTI exchanges, which could be complex in itself, this will continue to be a challenge.”

But an advisory compliance consultant at a bank says that if firm refuses to connect to the platforms, their counterparties will refuse to consume UTIs manually, and it could result in some firms being at “risk of being turned off”.

“If we have a counterparty that doesn’t want to use a platform to exchange UTIs, so that it is completely automates, STP and all that stuff. It is just irrelevant, we will turn around to the client and say, ‘you need to consume our UTI every single time’. So that’s the bank’s problem solved. Whether the counterparty can report or not, again we don’t really care too much about that, it’s not our problem given it is a dual sided reporting regime,” he says.

UTIs were already in use for the European Market Infrastructure Regulation (Emir) before SFTR. Weeks before the reporting deadline for Emir, the Advisory consultant says there were firms who weren’t ready and forced their counterparties to consume their UTIs.

UnaVista’s Talks is aware of some firms being quite specific in which vendor can be used for UTI generation, and require their counterparties to have log-ons with that vendor to consume the UTI directly.

But to connect to a UTI exchange is not a simple task, says the consultant. A client will have to build automated connectivity to the portal.

“That is all effort, it is a lot of stuff to do. [Counterparties] may not want to do it. They may need to use different vendors for example. There may be two or three vendors they would have to use in order to consume it, whereas they could try strong arming banks and just saying we are going to send you ours in a spreadsheet every day,” says the consultant.

Though the majority of large firms are ready for the reporting deadlines, Simon Davies, business development at Pirum says asset managers are still assessing their options.

For firms looking to incorporate Esma’s flowchart, in some scenarios they could be generating the UTI and in others consuming it, says UnaVista’s Talks. This will require firms to inspect current systems to understand whether they will be able to manage both functions.

“I think there might be some challenges for firms using technology that is not up to date because they could struggle to either generate or consume UTIs in the different scenarios. Most systems are set up to do one or the other – you are either generating every time, or you are consuming every time. Some of firms we’ve spoken to don’t have systems that can include a decision to work out when they should be generating or consuming and that has definitely added some complexity,” she says.

“The securities industry hasn’t been regulated in this way before. We’ve heard through industry associations, some firms might not have technology that is necessarily designed to manage this type of activity. This is because it is something that has not been required previously.”

The countdown

And there is a need for buy-side firms who come under the phase three reporting in October to be ready ahead of time.

“Given the phased implementation and the level of impact to different firms, there are large differences when it comes to the stage that firms are at when it comes to implementation,” said Sunil Daswani, head of business development, SFTR and securities lending at MarketAxess, via email. 

“Phase three firms may think they have longer, but must remember that if they trade with a phase one counterparty, they must be ready ahead of the April deadline.”

In its SFTR guidelines Esma sets out that the firm which generates the UTI needs to communicate it to the counterparty in a “timely manner so that the latter is able to meet its reporting obligation.”

But both Toye and the bank advisory consultant have heard firms demanding to have UTI generation and sharing occur within 30 to 60 minutes of a transaction.

“I’ve certainly seen a couple of firms saying that if you haven’t exchanged your UTI within 30 minutes or 60 minutes we’re going to generate our own UTI,” says the advisory consultant. “We’ve written back and basically said it's not going to happen.”

Esma is not aware of specific time pressure issues experienced by market participants, according to a spokesperson at the regulator.

“The correct implementation of the reporting requirements by counterparties is supervised by the national competent authorities. Esma will also be monitoring the overall rejection and reconciliation rates, as well as the erroring of submitted SFTs (which could be an indicator of SFTs where the UTI was not communicated timely) and will be assessing the need to provide any further clarification on this requirement,” said the spokesperson via email.

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