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The European Securities and Markets Authority (ESMA) has published a report on the data integrity of both SFTR and EMIR — the first since the introduction of both reporting regimes.
Designed to assess the quality of data reported by trade repositories (TR), the report gives an overview of actions taken by both ESMA and various national competent authorities (NCA) to enhance both regulatory regimes.
In view of the complexity and scale of Securities Finance Transactions Regulation (SFTR) reporting, it is important that all relevant stakeholders — counterparties, TRs, NCAs and ESMA — set aside sufficient resources to monitor data quality thoroughly, the report states.
Phase one and two of SFTR have been in place for a year, but the report presents a “limited overview” of reported data quality, including rejection rates, the European regulator says. And, despite the year’s worth of data — provided by one of the world’s most comprehensive reporting regimes — this ‘final’ report on SFTR is unable to present much in terms of actionable insight compared to the section on the European Market Infrastructure Regulation (EMIR).
An ESMA spokesperson tells SFT that the objective is to gradually expand the SFTR data quality section and provide an overview of SFTR data quality on par with the section on EMIR.
ESMA has been monitoring quality of SFTR reported data, the spokesperson says, and has engaged intensively with TRs to remediate any identified issues. “ESMA has put in place a data quality framework under which, jointly with NCAs, data quality matters will be analysed and followed up on,” the spokerson explains.
And there are many bugs to iron out. According to the International Capital Market Association’s (ICMA) Alexander Westphal and Richard Comotto, who spoke to SFT in February to look back on almost 10 months of SFTR reporting, there are “50-odd issues”. ESMA needs to “increase the number of data points to be published by the TRs”, Comotto says.
Problems plaguing the data include outstanding repo volumes at 147,000 per cent and some SFTs having negative collateral, Comotto adds. Responding to this, ESMA’s spokesperson says the main focus of the report is the supervisory (non-public) data that is being reported to TRs and made available to authorities. “Ensuring good quality of the data reported under SFTR is a joint endeavour between ESMA and the NCAs,” they state.
“As part of its supervisory and policy activities, ESMA has also been monitoring the quality of SFT aggregated data published by TRs. The identified issues are on ESMA’s radar and we are following up with the TRs and with NCAs, as appropriate,” the spokesperson adds.
ESMA’s report also lays bare ongoing cross-border transparency issues post Brexit. The lack of an agreement between the two interlinked but now separate economies and regulatory jurisdictions of the UK and EU has had a “significant impact” on SFTR reporting, with a nearly 50 per cent decline in the number of open securities finance transactions (SFT) reported in the EU since January. However, the number of open SFTs has seen an increasing trend more recently, the report states.
In December 2020, more than 2 million open SFTs were reported by branches of UK reporting counterparties, decreasing to approximately 250,000 open SFTs in the beginning of January. This decline was driven by the removal of UK and non-EEA branches of UK counterparties by TRs.
Other highlights from the report include:
- The number of rejected SFTs was highest in the early months of the reporting, peaking at 9 per cent in July 2020, but steadily improving to below 2 per cent in January 2021.
- A further characteristic of the SFTR landscape is the type of counterparty. Most submissions have, so far, been reported by investment firms and credit institutions (around 90 per cent of open SFTs). UCITS contribute to around 7 per cent of open SFTs.
Although Brexit has impacted the total volumes reported to EU TRs, the spokesperson tells SFT, ESMA has access to all data that is relevant for the supervision of SFT data quality in the EU. “EU counterparties and UK counterparties having branches in the EU that transact with UK counterparties still have a reporting obligation under EU SFTR, therefore ESMA and NCAs continue to have visibility over such market activity,” they add.
ESMA’s interim chair Anneli Tuominen says: “The publication of the first ESMA data quality report provides transparency to stakeholders on ESMA’s and NCAs’ activities aimed at improving the quality of data reported by trade repositories.
“While progress has been made, the report also identifies the need for increased efforts by ESMA, NCAs, TRs and reporting entities to ensure good quality data that facilitates the monitoring of systemic risk and financial stability.
“High-quality data is necessary to enable the effective use of data. Stakeholders need to be aware of the progress made towards better data quality and this annual report provides them with an important tool to monitor improvements to data quality."
The data quality report will be published annually and ESMA predicts later editions will provide a more comprehensive review of its findings.
Meanwhile, the report comes out shortly after EU policymakers were forced to concede a second grace period for third-country LEI issuers.
The LEI requirement was meant to come into effect alongside the rest of the SFTR reporting rules in April 2020 but was held back due to a significant lack of LEI coverage outside the EU.
One year on the situation is only mildly improved and, on the day the original grace period expired, ESMA initiated a second forbearance period which will expire in October 2022.
