Data and the need for interoperability
31 October 2017
The modern securities financing industry revolves around collecting and processing vast quantities of data, and providers are looking to help. David Lewis of FIS explains
Image: Shutterstock
Data is everywhere, at present. It is the subject of most client meetings and a fundamental part of strategies employed by every market participant. It can come in many forms, of course, such as market data to assist traders in making not only the best decisions pre-trade, but also post-trade as transactions are managed, processed and maintained. However, the data issues that are at the forefront of every securities finance market professional’s mind right now are regulatory.
Two major pieces of legislation are looming in our calendars, neither of which are news, of course. The second Markets in Financial Instruments Directive (MiFID II) comes into force on 3 January 2018 and those that are not ready to meet some of its stringent data requirements, such as using legal entity identifiers (LEI) as part of their data exchanges, will simply not be allowed to trade. Other, arguably draconian, conditions demand that any trades that are currently open but do not comply with the new rules will have to be closed out before the legislation comes into force. Regarding the effect on securities finance, MiFID II is arguably more about the fair treatment of clients, which brings its own data challenges.
Fair allocation has long been a fundamental part of the agent lenders’ process, filling borrowers’ orders using an algorithm designed to ensure incomes are spread as fairly as possible among a homogenous group of lenders. Changing client requirements, specifically around collateral requirements post the financial crisis, have made such allocations all the more problematic. As a result, agent lenders are having to devote more time and attention to both monitoring the allocation of borrower demand pre-trade, as well as providing evidential proof that they have both treated their clients fairly and delivered results in line with their best execution policies. At FIS Astec, we are working with multiple lending clients, looking at ways to deliver evidential market data solutions and benchmarking services to underpin their best execution policies.
Demands from borrowers, constrained by capital requirements, are also likely to place additional data burdens on agent lenders. Smart buckets are one solution being discussed across the market and a development FIS is looking at. By allocating each beneficial owner a category, or bucket, to belong to, borrowers can specify which categories would be acceptable to them from a risk-weighted capital point of view, for a given type of trade and level of fee paid, with the implication being that counterparties that are more expensive to deal with, on a measure of capital allocation required, might attract a lower fee.
Developing this from a data and systems perspective is multi-layered as borrower participants are unlikely to have the same smart buckets allocations in mind, indicating that each agent will have to manage and maintain a set of independent smart buckets for each of their borrower counterparts. Overlaying that with the requirement to prove that each market participant is treating its clients fairly in accordance with its best execution policy, adds an additional layer of complexity and need for evidential data analytics.
The other piece of legislation that is occupying a significant amount of market participants’ time and energy, as well as that of multiple types of service providers to the industry, including consultants, data services and, of course, systems partners such as FIS, is the Securities Financing Transactions Regulation (SFTR). While the deadline for compliance is significantly further into the future than MiFID II, significant efforts are already being made toward compliance with this important piece of legislation. There are few, if any, service providers to the securities finance industry that are not working toward delivering their part of a solution to this complex data requirement, whether it be as a consultant or technology provider.
At FIS, we are building data gathering, management and reporting capa-bilities to deliver a range of solutions for our clients, varying on their specific needs and subject to their overall compliance strategy. These solutions, delivering the data required by the European Securities and Markets Authority under SFTR, are, of course, just the first step toward global compliance with the Financial Stability Board’s transparency directive. As different jurisdictions around the globe introduce their interpretations of the transparency directive, data extracts and delivery mechanisms will have to be introduced to ensure compliance with each new regulation.
The data requirements under SFTR are certainly complex, if not very difficult to comply with, but they do rely on the gathering of extensive data points previously not considered by the industry. Working with the International Securities Lending Association’s vendors working group and with our own clients, certain pinch points are becoming clear, one notable example being the efficient exchange of unique transaction identifiers (UTIs), where trades are completed bilaterally without the aid of a trading venue or matching service. Producing UTIs is not the issue as they can be simply generated by trading systems as part of the trade entry mecha-nism; it is the transmission and exchange of these vital pieces of data between counterparties that is problematic. At a client event this month, FIS clients discussed this issue at length, looking at various options for data exchange between counterparties. While a number of possible solutions were mooted and are under investigation, the interoperability of the various providers to our market has become more evident. Loanet, as part of the FIS family of solutions, will be playing its part delivering UTIs for transactions in US assets, both for SFTR and future North American legislation. In meetings, FIS is holding with other similar service providers, the consensus appears to be that they will be doing the same.
Successfully delivering the data required to comply with SFTR is going to require a great deal of collaboration across the service providers, and each service will need to play its part, putting the needs of our mutual clients first. This is entirely analogous to the data sharing and interoperability that market participants will need to undertake, committing to deliver to each other data of sufficient quality and depth within the required timescales. At FIS, we are increasingly working with clients outside Europe who are, technically, out of scope in regard to SFTR, but who will need to deliver potentially significant amounts of data to their counterparties, if they wish to continue to trade with entities that are in scope under SFTR.
Looking forward, the European Commission has, perhaps surprisingly early, declared SFTR a success in relation to meeting the needs of the FSB’s Transparency Directive, suggesting that further data-gathering regulations may not be needed. While this may yet be proven right, what is certain is that effectively and efficiently meeting the requirements of the FSB’s Transparency Directive will require unprecedented levels of collaboration across market participants and the service provider community.
Two major pieces of legislation are looming in our calendars, neither of which are news, of course. The second Markets in Financial Instruments Directive (MiFID II) comes into force on 3 January 2018 and those that are not ready to meet some of its stringent data requirements, such as using legal entity identifiers (LEI) as part of their data exchanges, will simply not be allowed to trade. Other, arguably draconian, conditions demand that any trades that are currently open but do not comply with the new rules will have to be closed out before the legislation comes into force. Regarding the effect on securities finance, MiFID II is arguably more about the fair treatment of clients, which brings its own data challenges.
Fair allocation has long been a fundamental part of the agent lenders’ process, filling borrowers’ orders using an algorithm designed to ensure incomes are spread as fairly as possible among a homogenous group of lenders. Changing client requirements, specifically around collateral requirements post the financial crisis, have made such allocations all the more problematic. As a result, agent lenders are having to devote more time and attention to both monitoring the allocation of borrower demand pre-trade, as well as providing evidential proof that they have both treated their clients fairly and delivered results in line with their best execution policies. At FIS Astec, we are working with multiple lending clients, looking at ways to deliver evidential market data solutions and benchmarking services to underpin their best execution policies.
Demands from borrowers, constrained by capital requirements, are also likely to place additional data burdens on agent lenders. Smart buckets are one solution being discussed across the market and a development FIS is looking at. By allocating each beneficial owner a category, or bucket, to belong to, borrowers can specify which categories would be acceptable to them from a risk-weighted capital point of view, for a given type of trade and level of fee paid, with the implication being that counterparties that are more expensive to deal with, on a measure of capital allocation required, might attract a lower fee.
Developing this from a data and systems perspective is multi-layered as borrower participants are unlikely to have the same smart buckets allocations in mind, indicating that each agent will have to manage and maintain a set of independent smart buckets for each of their borrower counterparts. Overlaying that with the requirement to prove that each market participant is treating its clients fairly in accordance with its best execution policy, adds an additional layer of complexity and need for evidential data analytics.
The other piece of legislation that is occupying a significant amount of market participants’ time and energy, as well as that of multiple types of service providers to the industry, including consultants, data services and, of course, systems partners such as FIS, is the Securities Financing Transactions Regulation (SFTR). While the deadline for compliance is significantly further into the future than MiFID II, significant efforts are already being made toward compliance with this important piece of legislation. There are few, if any, service providers to the securities finance industry that are not working toward delivering their part of a solution to this complex data requirement, whether it be as a consultant or technology provider.
At FIS, we are building data gathering, management and reporting capa-bilities to deliver a range of solutions for our clients, varying on their specific needs and subject to their overall compliance strategy. These solutions, delivering the data required by the European Securities and Markets Authority under SFTR, are, of course, just the first step toward global compliance with the Financial Stability Board’s transparency directive. As different jurisdictions around the globe introduce their interpretations of the transparency directive, data extracts and delivery mechanisms will have to be introduced to ensure compliance with each new regulation.
The data requirements under SFTR are certainly complex, if not very difficult to comply with, but they do rely on the gathering of extensive data points previously not considered by the industry. Working with the International Securities Lending Association’s vendors working group and with our own clients, certain pinch points are becoming clear, one notable example being the efficient exchange of unique transaction identifiers (UTIs), where trades are completed bilaterally without the aid of a trading venue or matching service. Producing UTIs is not the issue as they can be simply generated by trading systems as part of the trade entry mecha-nism; it is the transmission and exchange of these vital pieces of data between counterparties that is problematic. At a client event this month, FIS clients discussed this issue at length, looking at various options for data exchange between counterparties. While a number of possible solutions were mooted and are under investigation, the interoperability of the various providers to our market has become more evident. Loanet, as part of the FIS family of solutions, will be playing its part delivering UTIs for transactions in US assets, both for SFTR and future North American legislation. In meetings, FIS is holding with other similar service providers, the consensus appears to be that they will be doing the same.
Successfully delivering the data required to comply with SFTR is going to require a great deal of collaboration across the service providers, and each service will need to play its part, putting the needs of our mutual clients first. This is entirely analogous to the data sharing and interoperability that market participants will need to undertake, committing to deliver to each other data of sufficient quality and depth within the required timescales. At FIS, we are increasingly working with clients outside Europe who are, technically, out of scope in regard to SFTR, but who will need to deliver potentially significant amounts of data to their counterparties, if they wish to continue to trade with entities that are in scope under SFTR.
Looking forward, the European Commission has, perhaps surprisingly early, declared SFTR a success in relation to meeting the needs of the FSB’s Transparency Directive, suggesting that further data-gathering regulations may not be needed. While this may yet be proven right, what is certain is that effectively and efficiently meeting the requirements of the FSB’s Transparency Directive will require unprecedented levels of collaboration across market participants and the service provider community.
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