Following concerns raised by the G20 and the Financial Stability Board (FSB) on the need for enhanced transparency and reduced risk of the fast-expanding shadow banking sector, in January 2014 the European Commission published a draft regulation on the reporting and transparency of transactions known as Securities Financing Transactions (SFTs). SFTs include repurchase transactions, securities or commodities lending and securities or commodities borrowing, a buy-sell back transaction or sell-buy back transaction, and margin lending transactions.
The draft Securities Financing Transactions Regulation (SFTR) is based on the following three pillars:
- Transparency to fund investors: UCITS (Undertakings for Collective Investments in Transferable Securities) and AIF (Alternative Investment Fund) management companies must disclose the use of SFTs to investors in their regular reports and pre-contractual documents
- Collateral reuse: The reuse of financial instruments can solely occur under a specific legal framework where the providing counterparty is duly informed about the potential risks related to reuse and has given its prior express consent
- Transaction reporting: Counterparties must report their SFTs to a European Union-approved trade repository
The first two pillars are already in force. A series of delegated and implementing regulations were published in March 2019, and the third pillar is going to enter into force in the coming months according to the following timetable (depending on the type of counterparty):
- 11 April 2020: Reporting obligation for credit institutions and investment firms as well as all third-country regulated firms
- 11 July 2020: Reporting obligation for central securities depositories and central clearing counterparties
- 11 October 2020: Reporting obligation for all other financial counterparties
- 11 January 2021: Reporting obligation for all non-financial counterparties
Core reporting requirements
Both counterparties to an SFT must report the details no later than the working day following the conclusion, modification or termination of that transaction. The report must include four categories of information: counterparty data; loan and collateral data - including the Unique Trade Identifier1 (UTI); margin data; and reuse data.
SFTR applies to all European ‘counterparties’, whether credit institutions, investment firms, fund managers or non-financial counterparties (corporates).
The key data challenges
SFTR implies some major data challenges, not least that:
- Each SFT should be reported to a trade repository. This requires a high volume of data: around 150 fields, with 62 to be matched by the trade repositories. These data will likely be fragmented i.e. residing in different counterparties’ systems – making capture in the right format to deadline a challenge
- New data are required, such as information on collateral reuse (i.e. whether the collateral is available for reuse or has been reused with the corresponding proportion).
- The UTI (Unique Trade Identifier) is an entirely new field and data management process for the SFT industry and counterparties. Yet it will be essential not only for trade booking and allocation but also for reporting of collateral and lifecycle events.
- Reuse of collateral needs to be reported including collateral pools. In the absence of a reliable solution to flag the securities within a pool of collateral, reporting counterparties will use the FSB generic formula2. The formula should be used to calculate the estimated re-use of collateral. To estimate reuse, companies will also need to calculate the total value of assets.
Next steps for reporting firms
Firms need to review data quality, especially with regard to those fields that can potentially cause pairing issues and breaks (e.g. price, values, Legal Entity Identifier). This also means that firms will need to identify all relevant data sources and ensure data consistency along the reporting chain.
Double-sided reporting will require counterparties to pre-reconcile a tremendous set of data within a predefined timeframe, throughout the entire trade lifecycle, in order to prevent rejection from trade repositories. Counterparties will need to align their interpretation of data and fields and set a series of tests to ensure the robustness of the workflow.
Managing exceptions with counterparties, in addition to the timing of resolution and escalation, will be critical. Reporting firms should define workflow with clear allocation of tasks (so the right person or team will have a view of any issues and resolve these in a timely manner). Strong record-keeping and audit trails should be set up in case of potential legal issues and to ensure continuous operational improvement.
The benefits of a vendor solution
SFTR is a necessary piece of regulation. Yet it is fair to say that from a data perspective, SFTR will be a complex piece of regulation for firms to implement.
In light of this complexity and the tight timescale for the transaction reporting pillar of SFTR to come into force, market participants should already be looking at their target operating model for implementation and considering the need for the right vendor solution. If used, a vendor solution should have the following features:
- UTI generation, pre-matching and submission to trade repositories, and post-trade lifecycle management
- An intuitive interface between counterparties’ front-to-back systems. This is particularly helpful because data, as mentioned, will be fragmented and reside in multiple systems
- A high level of data quality, as the reporting obligation and its related liabilities will lie with the counterparties of the SFTs
How BNP Paribas can help its clients
From an early stage, BNP Paribas Securities Services has been involved in the SFTR implementation process and in the major industry working groups. We are fully committed to support our clients with their SFTR reporting obligations by offering two reporting options:
- Delegated reporting, where BNP Paribas Securities Services manages all steps of the reporting process on behalf of the client by using its post-trade capabilities. When counterparties delegate reporting, they retain responsibility for the management of their relationship with the regulator and for ensuring that reports submitted on their behalf are accurate.
- Assisted reporting, where BNP Paribas Securities Services leverages a modular front-to-back solution to generate ready-to-report files (matching, enrichment, normalisation) held at the client’s disposal
BNP Paribas Securities Services is proposing the above reporting solution as part of its agency lending, exclusive lending and fail coverage programmes.
1 Sometimes referred to as the Unique Transaction Identifier
2 The formula can be found in paragraph 319 of the implementing measures published in March 2017 - Technical standards under SFTR and certain amendments to EMIR