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As the dust settles following the release of the Securities Financing Transactions Regulation’s (SFTR) final guidelines on Monday, the securities lending industry has had its say on the incoming reporting regime.
The first phase of SFTR is due to come into force on 13 April for investment firms and credit institutions, and July for central counterparties and central securities depositories.
Multiple market participants were quick to praise the European Securities and Market Authority’s (ESMA) decision to allow a 12-month grace period for the legal entity identifiers (LEI) requirement for third-country issuers, which was set to come in as part of phase one.
Dean Bruyns, senior director, message automation product management, at Broadridge, tells SLT that “a collective sigh of relief would have greeted the news that the ‘no LEI – no trade’ stance in third-country securities has been granted temporary relief”.
“This gives the industry time to lobby the issuers of securities to ensure that they obtain LEIs by April 2021,” he adds.
Bruyns further explains that the impact of being unable to trade in securities without issuer LEIs would have been “considerable” and had a “detrimental effect on liquidity and fails in the market”.
The scale of the market disruption being avoided through the application of the reprive was also outlined by EquiLend, which stated on Monday that requiring third-country LEIs from April “would have severely impacted market liquidity”.
In its report on the final guidelines, ESMA noted that, on average, 88 percent of instruments issued by EU issuers have an LEI code, compared to an average of 30 percent from non-EU jurisdictions.
Due to the clear disparity in issuer readiness levels, the EU watchdog noted in its report that “considering the still unsatisfactory level of LEI coverage on the global scale” it was adjusting its rules in order to “ensure the smooth introduction of the SFTR reporting regime”.
However, multiple industry figures observed that the delay did not resolve all concerns around SFTR’s fast-approaching go-live date.
Pirum Systems' head of SFTR business development, Simon Davies, tells SLT that although the delayed implementation for third-country issuers is a positive step, the fact that more than 10 percent of European securities are missing LEIs means “there will still be an impact on the industry when reporting starts, and firms need to carefully assess the impact this will have on trading, collateral and reporting capabilities”.
Broadridge’s Bruyns also emphasises that it is “critical that a proactive approach is taken to significantly increase the adoption of LEIs over the next 15 months,” adding that some issuers may be slightly reluctant to do so.
“After all, it's difficult for traders to short their security where there is no borrow allowed in it,” he notes.
Elsewhere, market participants have begun to pore over the other changes in the level three text, compared to earlier drafts.
Bruyns explains that another win for the industry came in ESMA’s acquiescence to industry consensus on the reporting of cash-driven securities lending transactions. The issue, he says, was that these trades have “more repo-like characteristics than traditional stock loans and fit better within the repo reporting template”.
Following last year’s consultation on the matter, ESMA has now stated that these transactions should be reported as repos.
“This makes sense, the challenge, however, is that counterparties will now need a way of identifying the intention of the stock loan to determine whether to report it as a stock loan or a repo,” Bruyns says.
As a result, a method of quickly identifying these types of trades will need to be factored into the implementation of SFTR reporting solutions.
Other key areas to review in the final text, according to Pirum, include the timing of event reports, agreement of collateral quality, valuations, pricing and foreign exchange sources, along with margin loan reporting and variation margin on repos.
Although initial responses to the release were largely positive, some lingering concerns have already been raised.
Sunil Daswani, senior securities lending and repo consultant at MarketAxess’ reporting subsidiary, Trax, tells SLT that there are still outstanding issues around front-load backloading, time-stamp validations, settlement (contractual versus actual), lifecycle events, haircuts, collateral quality, securities re-use and corporate actions in general.
Daswani also advocates for further discussions with clients and counterparties on the importance of bilateral “outreach” via the template questionnaires created by the International Securities Lending Association and International Captial Market Association.
He says that MarketAxess is proactively pursuing these discussions in order to “ensure further education on the regulation and coordination prior to go-live”.
“It is important to resolve issues around misunderstanding between either party reporting a transaction leading to unnecessary exceptions,” he adds.
