The delay to the launch of the Securities Financing Transactions Regulation (SFTR) will lead to further aggregation of regtech solutions, some providers argue. But the delay also exposes weaknesses in investment firms’ regulatory infrastructure, adding to market instability.
Mikkel Mördrup, executive advisor on global transaction reporting, Compliance Solutions Strategies, believes the coronavirus pandemic has provided a necessary push towards the use of multi-regulation compatible systems.
“I think that going forward we will see increased investments [in regtech] because some of the things that might have worked before in a normal world, now with the stress on the solutions it isn’t possible to run it, so you need to have different measurements in place and different processes in place in order to be less dependent on [full time equivalents] (FTEs),” says Mördrup.
“Before, you could see the argument for having a consolidated solution, but there was no real pain. There was no compelling event for moving, but now that COVID-19 is exposing the weaknesses in the setup, then this might start some thinking afterwards.”
The European Securities and Markets Authority (Esma) announced last week that phase one of SFTR would be delayed until July, following a joint letter by the International Securities Lending Association (Isla) and the International Capital Market Association (ICMA) asked for relief for firms amidst the coronavirus-prompted market crash. On March 20 the UK’s Financial Conduct Authority (FCA) clarified its position on Esma’s delay, deferring phase one from April 13 to July 13, effectively combining the two phases. Both Esma and the FCA have stated that they will continue to monitor the situation as the new deadline approaches.
“It gives [firms] some breathing room. And the monitoring bit you could interpret as if things are still problematic when we get closer to the July date, then maybe we can have another look at it again,” says Adrian Dale, director, Isla.
According to Mördrup, the onset of the European Market Infrastructure Regulation (Emir) and the Markets in Financial Instruments Directive (Mifid) prompted industry talk of consolidating reporting processes and reusing data to increase efficiency and cut costs. With SFTR, there is fertile ground for such adoptions.
“With SFTR that was the discussion, that investment firms should see it from a more strategic perspective, consolidate their reporting and also reuse the data so that they don’t have to have parallel reporting solutions. They could look at reporting obligations from a more aggregated perspective and I think when we have a crisis like this, fragile infrastructure or manual processes will be exposed,” says Mördrup.
Yet the delay exposes the industry to new instabilities and uncertainties.
“Given the current macro environment moving banks to remote working while also dealing with heightened volumes, much of the industry has been seriously burdened with inflexible, legacy onsite technology, which makes managing regulatory and systems change even more challenging,” said Mack Gill, chief operating officer, Torstone Technology in an email. Gill believes the SFTR implementation timeline will likely require further adjustments from regulators ahead of the third phase in October.
According the Mördrup, regtech companies will also need to adjust their businesses to cope with the industry’s instability.
“We have to work smarter moving forward. If you have a transaction, it might be subject to several different transaction regulations, meaning firms will want to reuse their data,” he says.
“I think that there is an effort that has to be done within the regtechs where investment firms have to go from the legacy and onsite platforms and move into a multi-tenant, multi-reg platform so you can reuse your data. And I think the change management and the cost of ownership can decrease over time.”
Apart from adjustments to a shifting market environment, he says regtechs should not expect a stark change to their businesses. The SFTR delay is “soft” says Mördrup, and if anything places greater emphasis on the need for technology solutions.
“Regtech is often fulfilling requirements and they are not going away; so I don’t think that is an area where you can make cuts. And it’s also often on the backside as the post-trading side of the industry, meaning that it’s not the same as fintech which is often something additional. The regulatory reporting is becoming an essential part of the investment industry, so from that perspective I think that the allocations will continue as the requirements are not going away from any regulator.”