Industry remains unprepared for SFTR
The introduction of Securities Financing Transaction
Regulation (SFTR) in 2018 will be one of the biggest ever fundamental changes
to the SFT industry, delegates heard at an EquiLend-hosted event yesterday. However,
the industry is only partially prepared to provide the required data to trade
repositories (TRs) by the 2018 implementation date.
The aim of SFTR, as with EMIR reporting, is to provide
regulators with sufficiently high quality data to successfully identify the
build-up of systemic risk. Some in the industry have criticised its approach as
heavy-handed and it certainly creates a huge compliance challenge.
The second round of ESMA’s consultation closed on 30 November and it is expected that its final draft technical standards will be submitted to the European Commission in January 2017 before being finalised.
Once finalised, firms will have 12 months to comply, starting quarterly by banks and investment firms, followed by CCPs and CSDs, financial counterparties and then corporates. Therefore, the effective dates are unknown but expected to start in Q1 2018.
The panel was unanimous in expecting little or no change from
the second draft text. “That has been pretty clear throughout this process. ESMA
has listened and made changes where it felt they needed to be,” said Laurence
Marshall, COO, EquiLend.
A poll of delegates asked how prepared their organisation
was for SFTR: it found that 47% thought that more analysis was required, 45% understood
the requirements but were still looking for a solution, and all of the remaining 8% was
not prepared. After the event, several people confided they thought this was
overly optimistic.
“The big challenge for firms is to look at how they process
their business today and consider whether they can get to the required reporting
through that model – I think the answer is ‘no’,” said Marshall. “There are
going to have to be fundamental changes.”
The reluctance of firms to invest in a reporting solution is at least in part due to confusion about where responsibility lies.
“I do not
think people are particularly clear as to the way the SFTR regulations will be
finalised,” said Nick Nicholls, lead consultant, GFT UK. “There is a lot of
concern about how they are going to meet those regulations. A number of clients
are looking to see how work that they have done for EMIR and MIFID II might
help them. There are a lot of unanswered questions that we hope to see
clarified.”
Agent lenders are usually on hand to help beneficial owners achieve
regulatory compliance and anecdotal evidence suggests they expect this to be
the case for SFTR, despite the obligations being on the principles to those
transactions.
James Day, managing director & business executive for
securities finance in EMEA, BNY Mellon Markets, said: “Most clients we are
talking to are looking to the agent lender to solve the problem. It they have
to build their own solution, I think many will question the benefit of lending
and this could impact market liquidity. The agent lender therefore needs to evaluate
the business case and associated risks of being part of the solution set and
price it accordingly.”
Patrick McManus, head of collateral resource management, Nomura, said his firm will be able to leverage its reporting systems developed for other products: “Our position to be able to provide such data is dependent on what we receive from the information providers, whether the lender or tri-party providers… we just need to make sure everyone else is collectively providing the same level of detail. For us, that is a concern.”
The SFTR requirements are closely aligned to those imposed
on the derivatives market by EMIR. While the securities lending industry can
learn lessons from its implementation it cannot expect the same leniency that
ESMA provided for derivatives and it is very unlikely that the timetable will be
pushed back.
EquiLend’s Marshall added: “Most regulatory teams do not
have SFTR as their number one priority today – so it is a big challenge for
everyone to get the resources they need. There is a huge opportunity to learn lessons
from EMIR. We feel strongly that the creation of a central trade matching platform
is the appropriate model in an environment where you are effectively reporting
matched trades.”
“The risk for the TRs and regulators to come back and query
submissions means firms could find themselves in a position where they are
building out trade reporting support teams that are the size of those for EMIR –
firms should really look to avoid that.”
It is unknown how lenient regulators will be regarding punishment
and perhaps fines for poor submission of data. While there have been no fines
under EMIR the regulators are making increasingly specific requests for data.
Mark Steadman, European head of product development at
DerivSERV, DTCC, said: “From a trade repository perspective, I believe the
regulators have learned a lot from their mistakes with EMIR. I do not expect
the same process under EMIR. They recognised they were getting very poor
quality data, which led to the level one and level two validations. Pre-reconciled
or pre-matched trades will going to make things a lot easier. We see that under
EMIR – you see much higher matching results.”
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