What benefits will come from the transparency SFTR brings?
Transparency is the reason behind the Securities Financing Transaction Regulation (SFTR); this continuous surveillance of the market will ensure its sustainability and highlight any risk of a build-up of leverage. The target is centered around two major areas:
• The combination of the collateral reuse report and the transaction/collateral report is the key behind this objective: this dual reporting of transaction and collateral updates and then its reuse will give a clear idea to regulators and counterparties on the risks surrounding the reuse of their collateral. As a result, it will help in indicating the impact of a potential crisis on this area of the financial market.
• Disclosure of the actual investors for the buy-side market players.
The success of this achievement will be reliant on the quality of data received and how it can be treated. Although we will have to wait and see the concrete results post-go-live, the first results of pre-production tests from market players are reassuring in a sense that it is better than the first results of the European Market Infrastructure Regulation (EMIR), nevertheless, there are still areas for improvements.
Pre-matching and following up on the International Capital Market Association (ICMA) and the International Securities Lending Association (ISLA) recommendations will be critical for success. The major driver is to reduce the number of breaks, as having transparency with breaks all along the chain no longer means anything.
What key lessons can be learnt for clients from the journey to the implementation of SFTR?
The data that needs to be collected for SFTR is coming from multiple areas in the firm and hence can be stored at multiple sources. Understanding the data model of each firm to meet their obligations and from where they can source that data is a crucial starting point.
The required data could include counterparty data from agent lenders, custodians, firms, or trading systems; loan and collateral data from legal databases, execution platform, affirmation platform, matching platform, +instrument reference databases, or trade risk systems; margin data from internal systems, central counterparties (CCPs), and clearing members; triparty agents and re-use of collateral data from omnibus accounts and other group entities.
This latter set has been highlighted by many of our clients as being the most difficult data set to source. Once you understand where that data can be sourced, consideration will need to be made on how to obtain, capture, store and feed that information into the firm’s reporting architecture. Vendors like Murex that offer a solution to cover all required data in a single system and widely connected to the market participants stand-out, as we can represent all SFTs across all the assets caught by the regulation and on the overall chain hence helping banks avoid half solutions and in-house integration.
What partnerships have you been involved in and how has cooperation aided in the marketplace?
We would really like to thank ICMA and ISLA, both of which played a major role in assisting and paving the way forward for vendors and market players. Being a member of both organisations has helped us to structure our offering early on and has motivated our clients to start understanding their data model and structure. Murex has developed integration paths to reduce the reporting burden of its clients. Our SFTR offering includes direct connectivity to trade repositories including DTCC’s Global Trade Repository (GTR), UnaVista and REGIS-TR; and IHS Markit and deltaconX reporting hubs.
Partnering up with them has led us to adapt our connectivity to make it flexible to cope with multiple offerings in the market, engage in early discussion for implementation and of course, follow and access trade repositories requirements early on. We appreciate DTCC-GTR, UnaVista et REGIS-TR for giving us access to their requirements and working together. This palette of packaged connectivity gives a wide choice to our clients to select what fits their current architecture best.
How has Murex helped and advised clients with regards to SFTR?
A total of 155 fields are required for reporting to the SFTR, with both counterparties having to report transactions and collateral having to be described with a certain degree of accuracy. We at Murex, have provided a gap analysis to our clients, reviewed their data model structure and advised on an adaptation of booking and event lifecycles to make sure it’s compliant with ICMA and ISLA recommendations, especially when it comes to rebooking or amending existing transactions. We recommended that our clients analyse with their counterparty as soon as possible on how they are booking and applying events on their trade and to adapt if necessary, and in our system to conceptually reconcile with their counterpart in our system.
Our offering is modular in a sense you can pick and choose from it. We offer the data sourcing and enrichment in addition to a wide palette of connectivity and exception management. We adapted our pricing model to fit the purpose of our clients where it depends on SFT type, reports, volumes and the connectivity itself. This will benefit clients to have adapted pricing.
Finally, the major benefit of SFTR is that it gives banks a chance to revamp legacy processes and platforms and we helped our clients along this path and their re-platforming projects.
What sort of questions are you receiving from buy-side participants right now?
The major concern coming from the buy-side is about wanting to delegate reporting without the will to disclose their full position. How can they do this with the collateral reuse report? The answer is not straightforward and it will implicate and expose global positions or invest in software for collateral reuse calculation alone.
For those who are using Murex, benefit from the fact that we modelled our connectivity to trade repositories and hubs in a way that you can store reports incoming from your brokers, CCPs, agents, etc, in MX.3 and calculate the collateral reuse reports within our system to help them better deal with exposing their global position to their agent or broker. This is done without the need to structure and capture the other three reports within our system and rely on the reports they receive.
Do you feel there will be issues around the provision of UTIs on time and what is the best course of action for any delays with these?
Murex proposes in its modular offering the possibility to model who needs to generate the unique transaction identifier (UTI) and generates it accordingly. That being said, in its SFTR guidelines, the European Securities and Markets Authority (ESMA) sets out that the firm which generates the UTI needs to communicate it to the counterparty in a “timely manner so that the latter is able to meet its reporting obligation”.
So, as the reporting delay is T+1, officially it shouldn’t be an issue as UTIs should not take more than a day to be shared. There is a major concern in the market on the vehicle and how to share the UTI.
Once again, the choice will be to either invest in a system or a reporting hub that helps sending the appropriate info or build the xml or swift message acceptable to send. Definitely, the major concern would not be on generating but on communicating to avoid breaks in reporting, this being the defining break reason in all preproduction tests.
We can always provide a solution for our clients to report but the market needs to have an official recommendation on what to do if you don’t receive a UTI on time, or again the objective of ESMA, transparency, will not be achieved.
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