For market data providers, it has taken years of processing to deliver solid, accurate data to a demanding marketplace. FIS’ David Lewis evaluates the difficulties that market authorities face in establishing reporting requirements that provide detailed insight into securities finance markets
The Securities Finance Transactions Regulation (SFTR) has been with us for over a year. That’s hard to believe given the significant time and effort invested into the build up and launch of the newest and most invasive regulatory reporting requirements to hit the securities finance and collateral industry. Still, as we all know, a lot can change in a short period of time.
As expected, the European Securities and Markets Authority (ESMA) has released a range of changes and updates to the reporting requirements under SFTR. These changes will undergo much scrutiny over the coming weeks as the deadline for adjustments is not far away at all: January 2022. These changes will—the industry hopes—be driven by thorough analysis of the data received so far which, as Jonathan Lee aptly described in SFT Issue 283, is “valid but wrong.”
And therein lies the rub. FIS Securities Finance Market Data, which is the new name for Astec Analytics Lending Pit, has been gathering, processing and delivering data to the securities finance and collateral markets for over 20 years. In that time, as you might expect, the business has learned much about gathering and reconciling data and turning it into actionable information.
Indeed, FIS was a member of the Data Experts Group drafted in by ESMA to understand the nuances and pitfalls of data gathering and processing. One of the primary pieces of advice offered at the time was to invest significant effort in deciding what the question is before determining the data that needs to be gathered. Whether that advice was heeded is, of course, a matter of opinion. But the tweaks to the data requirements quietly released on 26 July will give some insight to the level of analysis applied to the data gathered to date and whether it did, indeed, go any way toward answering the question posed by ESMA and the Financial Stability Board (FSB) before them.
The Transparency Directive, as instigated by the FSB, sought to bring certain aspects of “shadow banking” into the light, enabling potential points of failure in the global financial system and, in particular, the financing and collateral industry, to be identified before they brought down the markets they serve. Witness the collateral and securities lending collateral reinvestment damage done when Lehman Brothers went bust in what became known as the Financial Crisis.
Collateral chains
Few could argue that understanding the collateral chains of obligations from one firm to the next would help regulators understand the interdependency of major systemically important financial institutions. However, more may have foreseen just how hard it would be to understand and document those chains of dependency. Andy Dyson, CEO of ISLA, has said that “if you can’t measure it, you can’t manage it,” and those words could certainly ring true with where ESMA is with SFTR, especially when joined with Jonathan Lee’s “valid but wrong” assessment. Those outside the industry may well look at this situation with some incredulity. How can major global financial organisations not know what obligations they have undertaken, in what volume, against what collateral and to who? This question is easy to ask, but harder to answer. They do, of course, know exactly what organisations they have borrowed or lent assets from or to, what their value is and how much they are owed or will pay in fees. This is the data that allows them to function every day in a market where there is between US$2.5 and $3.0 trillion of outstanding loans in place on any average day.
The issues arise when the hundreds of market participants making up that market look to exchange that data between them, let alone when they look to report it to a third party. As the FIS Securities Finance Market Data service experience shows, all market participants appear to store and manage their data in slightly different ways, be that the name of the counterparty or the valuation accuracy of the security lent or borrowed. Typically, agent lenders will also report individual loan transaction allocations, whereas borrowers report a single block trade from a given agent lender.
The implementation of SFTR has changed participants’ approach to a certain amount of these differences, but not all. The identification of counterparts, for example, was a key issue and this was to be solved with the long overdue implementation of Legal Entity Identifiers (LEI codes). Without these, the ability to match loans with borrows in a single-sided reporting regime was going to be immensely difficult. Most of the reporting under SFTR (according to DTCC) is single sided, meaning that the reconciliation and matching process is the responsibility of the trade repositories. These issues have been exacerbated by the inclusion of third parties in the reporting chain compared with direct reporting from participants’ books and records. Many cooks spoiling broth jumps to mind.
FIS knows more than a little about this issue: we gather securities lending borrows and loans from across the world and from most of the participants in the market. Getting both sides of the trade still presents challenges, such as matching lender shapes against borrower blocks, but we can at least reconcile one side against the other to ensure that we do not double count or overstate the market position in any given security.
It has taken years of processing and experience gathering to be able to deliver solid, accurate data to a demanding marketplace, scrutinised in detail every day by exacting clients. On that basis, FIS can more than appreciate the difficulties ESMA is facing in looking to gain important insight into the securities finance and collateral market. To say there is more work to do is perhaps an understatement.
The latest tweaks may well be SFTR 2.0 and may bring improvements to the quality of the data gathered and processed, but the overriding risk remains that poor data that does not perhaps meet the standard of actionable information could lead to poor decision making. Market data providers spend a considerable amount of time and effort on ensuring the data they deliver is accurate, knowing full well that inaccurate information could cause a trading error. However, such things can be corrected and are relatively transient, especially in the world of securities lending. If a regulator is looking to make policy decisions affecting the whole market for extended periods of time, based on potentially inaccurate data, then that is a different issue indeed.
