SFTR – Challenging Regulation or Welcome Opportunity?

The Securities Financing Transactions Regulation (SFTR) is set to increase transparency in the securities financing transactions market, not currently monitored by other regulations. We examine the challenges and opportunities arising from SFTR.

1. Under SFTR counterparties to SFTs must report the details of future, and modifications or terminations of past, securities financing transactions to an EU trade repository within one working day
2. Due to its data-heavy nature, one of the biggest challenges facing firms is the quality of data that needs to be reported on.
3. SFTR is set to revolutionise the transparency of the industry

Since the global financial crisis, everything has changed. Initially, the inevitable regulatory response strengthened bank capital and enhanced governance standards. Then MiFID II and EMIR were introduced to safeguard investors - but what of the shortcomings in reporting of the shadow-banking sector?

Well, now the spectre of regulation has reached this previously unfettered domain.

Shadow-banks play a constructive role in providing alternative sources of credit. However, they are also a potential source of financial instability and systemic risk.

Under SFTR, participants in the European securities financing markets must provide daily reporting to a trade repository (TR) of every new trade, amendment, correction, error and cancellation, and the majority of lifecycle events, collateral valuations and legal entity-wide collateral reuse statistics.  

As a result, SFTR addresses the issue of opacity in the fast-expanding shadow-banking sector, focusing on:

• Transparency of reuse
• Transparency for investors
• Transaction reporting

Therefore, it is seen as a necessary building block in strengthening investor protection.

SFTR Challenges – from data quality to timestamps

SFTR is a data-heavy regulation (similar to MiFID II and EMIR). Therefore, without a doubt, the biggest challenge facing firms is data quality.

Beyond sole transaction data, approximately half the fields to be reported are on collateral or counterparty data. Also, as a dual-sided reporting requirement, most fields are to be reconciled with the counterparty. This means unique transaction identifiers (UTI) must be shared between counterparties.

The sheer detail of reporting that's required is daunting – 153 data fields compared to 129 for EMIR. Buy-side firms have to give their counterparties enough information to enable reporting (at minimum, LEI codes), which will most easily be shared using a technology reporting platform. However, tolerances for reporting discrepancies are minimal; therefore, data quality is critical.

Of course, before reporting can happen, data has to be sourced, leading to another challenge. For many firms, the required data may not be readily accessible. Often, it is located in systems not associated with the trading technology meaning the covered firm or vendor has to pull the information from multiple sources and enrich the dataset being sent to the repository.  
 
Timestamps are another potential source of confusion, especially when it comes to bilateral off-platform trades, where there is no established market practice on when to record booking times. However, the European Securities and Markets Authority (ESMA) has indicated that booking times can be accepted as execution times, although as these are likely to differ, it will be essential to agree on standard market practice.

Could Regulatory Reporting as a Service be the answer?

In all likelihood, due to a lack of investment in data foundations, several firms will end up with ad hoc, purpose-built solutions. Their ability to combine siloed data, on time with the right quality, is going to be a huge hurdle to overcome. However, firms also have to be able to aggregate all the separate data, audit the data for completeness and quality, and efficiently extract the data for reporting in the correct format.

SFTR is only one in a long line of regulations, and with more sure to follow, firms must look at the bigger picture and find a way of consolidating fragmented data sources and ensure data consistency, to enable them to keep up with growing regulatory demands.

Cloud-based Regulatory Reporting as a Service simplifies transaction reporting, automating the process and collecting, enriching and checking transaction information. By consolidating reporting across regulatory regimes, including EMIR, MiFID II, and SFTR, it gives firms more control and transparency. As a result, transaction reporting becomes a much simpler, lower-cost process.

Opportunity not burden

Some may view SFTR as another burden on an industry already suffocating under a deluge of regulation. However, it’s an opportunity to rethink their data architecture and centralise reporting into a common platform.

Regulation will continue to evolve; however, using Regulatory Reporting as a Service allows firms to remain up to date without a hefty investment in internal teams to prepare for the introduction of future regulatory demands. Being in the Cloud, it is continuously maintained and updated, so firms are regulation-ready as soon as new requirements become mandatory.
 
In addition to streamlining, cost saving, and removing the burden of regulation, Regulatory Reporting as a Service also delivers the transparency the industry so desperately needs. It’s the first step to the consolidation of data reporting, giving firms a global view of their data for the first time.

Finastra’s Regulatory Reporting as a Service seamlessly manages reporting across different regimes, including SFTR, while balancing the needs of regulators, key stakeholders, and the business. For more information on how we can help you meet your regulatory reporting requirements, please contact us at capitalmarkets@finastra.com or visit finastra.com/regulatory-reporting.