A year after go-live, SFTR’s successes and failures have been scrutinised in a Pirum and IHS Markit survey — IHS Markit’s executive director for SFTR Fabien Romero and Que-Phuong Dufournet-Tran, director for trading services and analytics and regulatory affairs, spoke to SFT about the lessons learned, what work still needs to be done and why SFTR is a model for future regulations
Following the go-live of the Securities Financing Transactions Regulation (SFTR) in July 2020, Pirum and IHS Markit’s SFTR Post-Implementation Industry Survey, conducted a year later, found that over 70 per cent of respondents — banks, asset managers, hedge funds and brokers — aim to consolidate their various regulatory reporting requirements.
The benefits of outsourcing regulatory reporting to third parties, such as IHS Markit, were clear, the survey showed — offering advantages in terms of speed and convenience of roll out, as well as the upside of a collaborative approach to implementation and interpretation of new rules.
Other key considerations for firms were data harmonisation, improving overall data quality and enhancing the quality and accuracy of their reporting, particularly for collateral data to meet regulatory requirements for greater transparency. Importantly, the report said that while fines for SFTR non-compliance or inaccuracy have not been handed out to date, regulators still expect firms that are in scope to ensure they are reporting accurately and promptly.
Unique trade identifier (UTI) pairing was probably the major challenge going into SFTR, according to respondents. But a year after SFTR went live, 80 per cent of firms say they have been able to achieve all or most of their pairing. By contrast, only 28 per cent of respondents are satisfied with their UTI pairing for EMIR several years after implementation.
On a positive note, regulators have learnt lessons from previous regimes and SFTR appears likely to be the model on which future regulatory reporting requirements are based, the report said. With over 70 per cent of respondents claiming they aim to bring together their various regulatory reporting requirements under a single platform in the not-too-distant future, firms may face challenges in consolidating their reporting requirements. But there are clear upsides.
The number of regulations worldwide that global firms, and local firms, are subject to is expanding, IHS Markit’s executive director for SFTR Fabien Romero said. There may be different nuances of the same regulation being implemented across different regions and, for those firms with a global reach, it makes sense to manage all these various regulations in an integrated way.
In the past, many firms had a tactical approach to these various regulations, where they would handle them individually, creating new teams. Now, based on the sheer volume of the reporting and its associated complexity, it is more efficient for firms to approach this using a single, integrated team to manage this change agenda.
There is a push from regulators around the world for data harmonisation, recognising the advantages for data quality in leveraging the same underlying data and the cost benefits of eliminating duplicate reporting and processes. It is important to move away from legacy systems and have efficient streamlined data management, collection and reporting. “The path to achieve data consolidation and harmonisation is as important as the ultimate longer term objective, with everybody moving in the same direction,” said Que-Phuong Dufournet-Tran, director for trading services and analytics and regulatory affairs at IHS Markit.
Firms that have already invested heavily in in-house technology to meet regulatory reporting needs may find it difficult to abandon their legacy systems in favour of an outsourced service from a third-party. But there are potential benefits to switching. Regulations and requirements constantly evolve and this can present a heavy maintenance overhead in keeping internal systems up-to-date. But as a third-party vendor you can leverage insight and learnings across 200-plus clients or members, and share the cost across a wide community of users, Romero said.
For firms that continue to maintain their own internal systems, third-party providers can bring added value in terms of the analytics and reporting tools they offer to clients. The survey identified improving overall data quality as a top priority for respondents and Dufournet-Tran related the question of improving data quality back to the previous point on controls and monitoring. “You need to have the tools to go to the root cause of an issue — beyond the 98 per cent acknowledgement ratio at the trade repository for the market, what about the report content, how does it tie back to the process?”
Firms also need to have the right people, with adequate expertise in terms of technology, business and knowledge across regulations. And firms must work on improving the quality and accuracy of their reporting, particularly around collateral data to meet the regulators’ objectives, the survey found, which is to promote greater transparency as prioritised in the ESMA, EMIR and SFTR data quality report of April 2021.
But there are still key steps before achieving this objective. “With SFTR, collateral data still has a lot of structural issues,” Dufournet-Tran said. For example, before getting the collateral data fully correct, firms need to have correct ISO XML schemas and validation rules.
In line with this point, there has been a push from regulators for data harmonisation, utilising industry standards whenever possible — including ISO standards such as ISO 20022 for messages and ISO 17442 for Legal Entities Identifiers, for example.
For derivatives, the Critical Data Elements (CDE) 100 fields have been selected as key to defining a derivative as per the Committee on Payments and Market Infrastructures (CPMI) and the Board of the International Organization of Securities Commissions (IOSCO), with CDE now governed by the Regulatory Oversight Committee (ROC) since October 2020.
This means that if the US, Asia or EU want to pick a field within the 100 Critical Data Elements, they would have to agree on the definition and the format. “But a one-size-fits-all approach is not always feasible,” Dufournet-Tran added, so international bodies such as the ROC allow discussion of data harmonisation.
There are also industry efforts or public-private initiatives, such as the Bank of England’s Data Collection programme, which provide a forum that bridges financial regulators, the industry and third party providers. The European Commission EU financial data space has developed a supervisory reporting strategy with ‘SupTech’ and ‘RegTech’ supervisory and regulatory technology, promoting data standards and sharing, and digital finance.
“There are also working groups from the trade bodies and associations that, as a company, we are a member of,” Romero said. ICMA, ISLA and ISDA have various working groups around this field, “so we encourage firms to take part in these groups just to make sure they are aware of all the work which is being done in terms of data harmonisation.”
While fines for SFTR non-compliance or inaccuracy haven’t been levied to date, regulators have shown that as new reporting regulations are bedded down, they expect firms that are in scope to ensure they are reporting accurately and promptly. But just how well are in-scope firms now equipped to meet this obligation? Romero outlined what it takes to be in compliance once regulators begin doling out fines. “You need to report, you need to report everything and you need to report on time. Provided that you have these different things covered, then you are in-scope. I think that we really need to stress the audit and control function,” Dufournet-Tran noted. “You may not achieve 100 per cent of pairing but if there is an issue then you need to be able to document and trace back quickly to the root cause, and the tools to achieve that are extremely important.”
Past experience
Having learnt lessons from previous regimes such as EMIR and MiFIR, regulators have taken these on board and SFTR appears likely to be the model on which future regulatory reporting requirements are based. Drawing comparisons between previous regulations and SFTR, Dufournet-Tran said the controls were the ‘forgotten child’ for EMIR, because they were put in place after the regulation was implemented. Whereas with SFTR, controls have been built as far as feasible at the same time as the reporting function. And industry engagement was stronger for SFTR with more testing efforts — bilateral testing, then multilateral testing, were key and pre-matching platforms allowed for UTI exchange testing prior to go-live on a mass scale.
UTI pairing was probably the major challenge going into SFTR. Yet a year after SFTR went live, 80 per cent of firms say that they have been able to successfully achieve all or most of their pairing. In contrast, the survey shows that only 28 per cent of respondents are satisfied with their UTI pairing for EMIR several years after implementation. That is a testament to the work done by the market, the report said.
On the 80 per cent of firms who say that they have been able to successfully achieve all or most of their pairing Romero said, “I think we have to take it with a pinch of salt but what we can learn from it is the happiness, the degree of satisfaction, that firms have in terms of where they are versus where they were expecting.”
But there does seem to be a higher matching and pairing level in SFTR versus EMIR, due to the fact more testing has been done prior to go-live, more engagement with the industry and between the different participants, and probably with more clarity in terms of controls. With this framework in place, the environment was ready for the moment of trade.
EMIR pairing rates are at around 50 per cent seven years after the go live, whereas for SFTR the pairing rates are now already at circa 50 per cent at the TR and 80 per cent for trades just one year after the go live. Platforms such as IHS Markit’s solution helped with the pairing, Dufournet-Tran noted.
“Before getting to the TR, you need to have a UTI first. Its exchange is achieved through the reconciliation of minimum key pairing fields, which should help both parties communicate to align on bookings, life cycle events and key trade economics,” Dufournet-Tran said. For SFTR, firms could already leverage an existing reconciliation process on trade economics for billing and settlement on securities lending and repo.
A significant portion of the market uses the IHS Markit platform and in order for IHS to pair the trade the firm uses the UTI, but it’s not absolutely necessary for the pairings. “When it comes to doing the reporting to the trade repository, you would expect that more UTIs have been exchanged to reconcile alongside the minimum fields required by the trade repository,” Romero concluded. “So you have all this infrastructure to increase the data quality before it gets to the TR whereas with EMIR you probably didn’t have that in place.”
