There are growing concerns about the health of the European
repo market. Latest signs of stress in the market materialised
around year-end 2016, which saw significant volatility and
dislocations with banks effectively closing their books for
repo business. A recent ICMA report assessed the reasons
for these events and not surprisingly found regulation among
the key contributing factors.
However, it is not only participants in repo trades, both
selland buy-side, who are feeling the pressure from regulation.
The repo back office is facing important challenges too. Most
importantly, the push from regulators to shed light on the
so-called shadow banking system has led to an increased focus
on securities financing transactions (SFTs), including repo and
In Europe, this resulted in the adoption of the EU SFT
Regulation (SFTR) which, among other things, is set to
introduce extensive regulatory reporting rules. While the law
itself entered into force in early 2016, the details of the
reporting rules are still being hammered out by ESMA, the EU
securities authority. ESMA’s final technical
proposals are expected to be submitted to the Commission by the
end of March.
What is already clear is that successful implementation will
require banks and all other users of the European repo market
to rethink the way repos are processed. According to the latest
ESMA proposals, market participants will need to report over 70
data fields on each of their repo trades. This would cover
information on the counterparty, the details of the loan as
well as extensive information on the collateral component.
On top of this there will be additional fields related to
the reporting of margining and collateral re-use, a
particularly controversial element of the regime. In line with
the reporting framework for derivatives introduced by EMIR, the
SFTR requires double-sided reporting. Both reports have to be
submitted to specifically authorised trade repositories (TRs),
which are expected to pair and match them, both intra- and
across TRs. regulators expect most of the 70-odd fields to
match with only very limited tolerance allowed. There are
doubts whether this is a realistic approach given that firms
themselves currently only capture a small proportion of the
data fields required by the SFTR.
Lessons from EMIR
The experience with EMIR is not encouraging. Matching rates
have been dismal from the start and have in many scenarios
still not reached meaningful levels. SFTR includes some
improvements over EMIR, in particular related to the
standardised ISO20022 format or additional guidance on unique
trade identifiers. However, the implementation challenges
remain substantial and the time until expected go-live of the
reporting, in late 2018, is limited.
Reducing the number of both reporting and matching fields,
at least at the outset, would help. This could be done for
instance if the rules would leave it to TRs or regulators to
derive parts of the information from available central sources
for static data, e.g. using reported ISIN codes to retrieve
information related to securities collateral. Not only would
this lower the implementation burden for firms, but it would
also reduce the scope for data inconsistencies and thus make it
easier for regulators to use the date for supervisory purposes.
In its latest consultation response to ESMA, the ICMA ERCC has
made a number of concrete proposals to achieve this.