By Val Wotton, Managing Director, Product Development & Strategy, RDS at DTCC.
When English art historian John Ruskin wrote, “Quality is never an accident; it is always the result of intelligent effort,” he was writing about Venetian architecture, rather than financial regulation. However, Ruskin’s endorsement of forethought and preparation are applicable to the preparations necessary ahead of the upcoming implementation of the Securities Financing Transactions Regulation (SFTR).
SFTR is scheduled to go live for banks and broker-dealers mid-April, for CCPs in July, followed by buy-side firms in October. In January 2021, the regulatory mandate will extend to non-financial counterparties. In order to successfully comply, financial services firms must put intelligent effort into not just their preparations, but into testing their approaches, in order to reach the optimal level of compliance with SFTR’s requirements.
Like MiFID II, SFTR can be characterised by its extraterritorial reach – it applies to entities which are either established in the European Union, including all branches irrespective of location, as well as all entities that are established in a third country, where a securities financing transaction (SFT) is concluded in the course of operations of a EU-based branch of that counterparty. At the core of the regulation is a new trade reporting requirement which applies to repurchase agreements (repos), sell-buy back and buy-sell back activities; securities and commodities lending and borrowing; as well as margin lending and borrowing.
In general, the industry should be commended for its rigour with which it approached SFTR reporting preparations. It is evident that industry participants have taken the hard-learned lessons following the implementation of the European Markets Infrastructure Regulation (EMIR) and MiFID II reporting mandates, by approaching SFTR from a more strategic standpoint, including ensuring future-proofing for possible adjustments to the regulation further down the line.
However, while preparations are well underway, with less than two months to go until Phase One implementation, challenges remain in areas such as accessing, validating and obtaining the data necessary to meet SFTR reporting obligations. This isn’t entirely surprising, as SFTR is expected to produce reporting volumes of up to 500% higher than current levels of trade bookings, with 155 data fields to be completed, 96 of which must eventually be reconciled on an end-state basis.
The phased implementation of the regulation creates further challenges. While the go-live for buy-side firms is not until October, certain information, such as legal entity identifiers (LEIs) and unique transaction identifiers (UTIs), may need to be provided to their dealer counterparties before their respective reporting obligations are phased in. As a result, some buy-side institutions may need to undertake a ‘soft’ go-live ahead of the official deadline to ensure the information requirements can be fulfilled in advance.
True intelligent effort toward timely SFTR compliance is industry-wide testing. DTCC initiated industry-wide user-acceptance testing (UAT) for SFTR in October 2019, free of charge to allow firms to benefit from an extended period of verification, hence increasing their levels of preparedness for SFTR requirements on day one of implementation. Early availability of a test environment is critical; before progressing into end-of-day reports, clients must submit trade reports to a trade repository, manage the process and if required, resubmit rejected reports. Insufficient time allocated to UAT can therefore lead to non-compliance when SFTR goes live, plus expensive remediation following implementation. What is more, in addition to UAT environment access, firms are now equipped with the required regulatory clarity necessary to progress their preparations and focus on testing. At the start of 2020, ESMA published the third and final round of SFTR guidelines, taking on board the feedback the regulator has received from the industry.
SFTR implementation is expected to affect up to 60% of business processes, therefore challenges are unavoidable. Testing operational systems ahead of the go-live date is the best way to ensure firms can handle the new trade reporting requirements, facilitating quality and compliance on day one.