Major tier one banks are putting pressure on trading venues to provide a much more compliant Securities Financing Transaction Regulation (SFTR) confirmation file from the beginning, according to Jonathan Lee, a senior regulatory reporting specialist at Kaizen.
“Pretty much everyone in the chain is looking for ways in which to cut costs and to some extent pass on the onus and responsibility to others. Even among the tier one banks, they are looking to trading venues that will provide more of the reportable field in the appropriate format such that they don’t need to collate and process that data themselves,” Lee says.
“If you can deal with the trading venue that already provides you with say 60 - 80 of the reportable fields, you will work with that trading venue that will provide you with that information up front,” he says.
For Quinn Perrott general manager at TRAction Fintech, the sheer volume of regulation means that firms are often citing ease of compliance as top priority when considering which trading venue to partner with.
“I wouldn’t be surprised if a lot of venues are using it as a selling advantage, and firms, instead of just looking at where they have the best partnerships, or where can they make the most revenue, which is the easiest to comply with the regulations is becoming much more of a factor in the selection of a venue or even a counterparty in some cases,” says Perrott.
“At the moment there has been such a regulatory overload, there were changes to Emir late November, then there was Mifid II to roll-out, then there has been stuff with Brexit, there was GDPR that came in last year that impacted some of the reporting, and then SFTR on the horizon, in a lot of cases financial firms are just doing thing the easiest way as opposed to the best way.
“We have had early discussions with clients where they have been trading with US firms, they looked at the cost of building out the trade reporting that they would require and, in the end, just chose to trade the same products with European based brokers, and prime brokers,” he says.
The onus of delegated reporting
Under the European Commission’s technical standards, reporting of details regarding SFTs conducted by either financial or non-financial entities is required.
However, the European Securities and Markets Authority (Esma) is clear that both counterparties have a reporting obligation.
Regardless of whether firms delegate their SFTR reporting requirements, firms are focused on preparing internal programmes to deal with the data challenge, according to Catherine Talks, SFTR Product Manager, UnaVista.
“Whilst there is pressure on vendors and middleware providers to supply data to market participants, there is an understanding that the obligation lies with the reporting party,” said Talks.
“There are a mix of firms we have talked to, some are looking to take in various data feeds, to collate the data and do the report generation in-house. Others are looking to delegate the reporting obligations to other parties. Most firms however, are aware that there is a lot of data required to generate a report and have started programmes internally to address data challenges,” she said.
This is something that Lee sympathises with.
“There may not only be pressure on the banks to provide some level of delegated reporting, but there may also be pressures on the other market participants and the infrastructures to provide a lot of the data again for reporting purposes. This will be both to the buy-side – to your funds and regular clients – but I believe the banks themselves will be requesting lots of information from these other parties too,” says Lee.
“Delegated reporting may be slightly different from the model that we have seen for Mifid II for example on the basis that there are quite a few more moving pieces than there are for Mifid II reporting, and the challenge therefore may prove to be greater,” he says.
As with delegated reporting under Mifid II, SFTR will bring significant challenges for those working in banking operations, and compliance teams, says Lee.
“What happened in the case of Mifid II was a situation in which the banks rallied together and said, ‘we don’t want to offer delegated reporting because there is a lot of personal information required in relation to these transactions, and we are also required to provide information in relation to their short sales for equities, and for sovereign bonds. Therefore, we don’t think that any of our clients will be willing to give up this information, and we don’t want to be held responsible for storing that information, nor reporting it,’” says Lee.
“However, with less than six months until going live, one of the major tier one banks essentially rolled over and said they would offer delegated reporting services, at which point of course they fall like a pack of cards. As soon as one major tier one bank says they are offering delegated reporting, the others really have no choice but to follow – you’re going to lose a lot of clients potentially if you don’t offer delegation,” he says.
SFTR requires 153 fields of data, in comparison to Emir (85) and Mifid II (65), and up to 80 of these fields must be matched.
The underlying challenge is one of data, because of the 153 fields of data, about 40% are typically not the sort of things that are readily available, according to Andrew Kouloumbrides, CEO at Xceptor.
“Banks, whoever they may be, are struggling to get hold of all the data. There is a big challenge around how do you get the 60% that you hold, because it can be held across multiple different data sources within your organisation, and then how do you add the 40% to it. How do you enrich that data?” says Kouloumbrides.
Concern over the use of different trading and settlement systems, which can produce variations when compared to a counterpart is becoming of increasing importance to market participants, according to Adrian Dale, the International Securitises Lending Association’s (Isla) director of regulatory policy and market practice.
“If you’re comparing trade lifecycle events in your system to the regulation, you will quickly realise that these events need to be better defined in your system. There is a market wide conversation going on today regarding this topic as market participants use different trading/settlement systems that produce variations when compared to their counterpart. As the regulation requires dual sided reporting, this creates a reconciliation break,” says Dale.
“Now that trading and settlement systems need to provide standardised output to a regulator, another issue that could appear relates to legacy functionality.
“Many securities lending participants have, over time, added special characters to these fields to control downstream functionality. For example, settlement location, collateral type, branch, master agreement, trading strategy and many others may be combined into a single field. This could either result in system development or further mapping to align that field with the output required by SFTR,” he says.