17/05/2018 – By Gaurav Chandra, Product Manager, AxiomSL EMEA
The European Union (EU) introduced the Securities Finance Transaction Regulation (SFTR) after the Financial Stability Board (FSB) and European Systematic Risk Board (ESRB) proposed policies to reduce risks by improving transparency of securities financing transactions (SFTs).
SFTR regulation requires market participants to report all SFTs to an approved trade repository (TR) on a T+1 basis. The SFTs in scope include security lending and borrowing transactions, repurchase agreements (repos), reverse-repos, sell-buy backs and buy-sell back transactions. It is crucial that firms understand the product scope of the regime to accurately satisfy the reporting requirements.
The reporting obligation under SFTR is to report the transaction data and the corresponding loan/collateral data as defined for that SFT. The reporting kicks-in in a phased manner and is estimated to begin in Q2 2019, contingent on the approval of the European Commission (EC). Both financial counterparties (FCs) and non-financial counterparties (NFCs) are obliged to report SFTR whether they are established in the EU or in a third country with their SFTs carried out within the operations of an EU branch.
While SFTR presents substantial challenges for market participants, it also introduces an invaluable opportunity for firms to automate and streamline their reporting infrastructure strategically. Preparing for compliance will offer wide-range of benefits from data management and transparency to operational and cost efficiencies, provided the right systems and processes are in place.
The main challenges of SFTR will include unique transaction identifier (UTI) generation, collateral reuse, eligibility, completeness and accuracy of data and the reporting format.
UTI generation: SFTR regulation demands the provision of UTIs for all SFTs to ensure seamless trade matching and data reconciliation. UTI generation has typically been a challenge for prior regimes as well and SFTR will be no different.
Agency lending & collateral reuse: Agency lending trades with multiple underlying collateral will force both the collateral taker and the collateral provider to independently report each principal as an independent transaction and identifying this reportable information will be particularly challenging for firms. In addition, as the market participants can reuse collaterals, the chain of collateral reuse activities can be extremely difficult to monitor, identify and report.
Eligibility: Considering the volumes of SFTs being traded, knowing which transactions to report is a serious challenge posed by the new regulation. This calls for a strategic platform that offers eligibility engine which accurately identifies the reportable transactions under SFTR and reports them to the relevant TR in an automated fashion.
Completeness and accuracy of data: The new SFTR regime requires highly granular data which in most cases needs to be extracted from multiple sources as market participants tend to house multiple collateral systems. As a result, extracting key data can be a difficult process for many firms and requires efficient data aggregation capabilities that bring together data input from multiple sources with a single view.
The reporting: European Securities Market Authority (ESMA) specifies the format for the SFTR reporting whereby all data must be reported in a standard ISO 20022 format. This aims to avoid data quality and data inconsistency issues and improve aggregation and transparency.
Markets participants need to plan ahead now to efficiently tackle these challenges.
A strategic approach to trade and transaction reporting
The implementation of SFTR will require firms to rethink about their data management capabilities to accurately comply with the regime and avoid any potential sanctions. Further, as is the case with trade and transaction reporting, SFTR will present very strict guidance on audit and control of historical transactions and life cycle events. Increasingly, firms are beginning to realise how software solutions can easily meet these complex demands whilst enhancing their operational efficiencies and greatly reducing cost of compliance.
AxiomSL creates reporting synergy to satisfy multiple regulatory requirements on a single strategic platform. Our SFTR solution delivers all the key features and benefits to comply with the new regime, including the provision of eligibility engine to identify reportable transactions and submission of required reporting data in ISO 20022 format. Our robust, flexible and transparent regulatory platform complemented by inherent data management, data lineage and audit capabilities ensure timely and cost-efficient compliance whilst increasing operational efficiency. Key data lineage capability ensures clients can go back and trace the historical life cycle events of a trade including why the trade was flagged as eligible under SFTR reporting and how it was reported.
AxiomSL’s strong data management capabilities also enable clients to pull information from multiple sources to satisfy all their trade and transaction reporting requirements including SFTR, EMIR and MiFID II by sourcing the data in one instance. The platform then ensures the data is utilised to report for multiple regimes when needed, as trade and transaction regulatory compliance space will only get more stringent.
Ultimately, firms should take a strategic approach to SFTR, which is a substantial opportunity to restructure their reporting processes, and go beyond merely delivering yet another report to the regulators.
Click to find out more about AxiomSL’s SFTR Solution.