SFTR Preparations Stifled by Data Availability

The need to obtain necessary data points and automate workflows is causing considerable challenges for the industry ahead of the phase-in of the Securities Financing Transactions Regulation (SFTR), which is set to begin in the second quarter of 2020.  

The complex regulation mandates a dual-sided reporting structure, where each counterparty firm is required to report the “conclusion, modification and termination” of an entire event lifecycle on a T+1 basis to a trade repository (TR). It targets multiple divisions, including repurchase agreements (repos), buy/sell-backs, securities lending, margin lending, and stock and commodities loans. As each counterparty firm involved in an SFT trade or in the reuse of collateral is required to report, capturing the data necessary to fulfill the compliance obligations is becoming an incessant problem, particularly as the deadline closes in.

Speaking at an SFTR panel discussion at the SimCorp Regional Summit in London on May 14, Hussain Abdullah, a senior manager on Deloitte’s risk advisory team, explained that many of the problems center around the primitive systems and legacy processes that still exist in SFT trading. He highlighted that the SFT world has fallen behind compared to other parts of the industry when it comes to embracing technologies and automating practices. 

“So all the other areas have moved forward because of Mifid II and because of regulation in that space, but what you see when you look at an SFT ecosystem—arguably this is not the same with all firms—is that there is generally a line between the integrity and efficiency of processes, because the SFT ecosystem is not as mature as these other areas,” he explained.

Even today, a large portion of the repo market still suffers from manually led processes and outdated systems. Millions of transactions are still carried out using basic technologies and practices such as email, phone calls, faxes, and spreadsheets. The challenge is that counterparty firms will have to capture large volumes of data from multiple parties (counterparty firms, agent lenders/dealers, central securities depositories, etc.) across a complex chain of events and allocate the reports into 153 fields across four different categories—margin data, transaction data, re-use data, and counterparty data. It is a colossal task by any measure and according to some, may discourage firms from trading SFTs at all. 

“I think that is one of the strategies that some of the smaller players are looking at, [in terms of] what they have done before, in a rather manual way and if they would like to continue given the return they generate in SFTs,” explained Carsten Kunkel, head of SimCorp’s regulatory center of excellence, during the panel discussion. 

The Agent Lender

Adding to the complexity is the role of the agent lender. These specialists operate on behalf of the beneficiary firm in allocating trades and bridging communications between the borrowers and other counterparties. As the middleman in SFT process, their position allows them control over most of the transactional and collateral data in the trade lifecycle. Some say the agent lender is naturally in a position to facilitate market transparency under the regulation, rather than solely helping counterparty firms to fulfill their SFTR obligations.

“What’s ironic about this regulation is that the firms with the most data and the most visibility in this industry are the agent lenders, and they don’t have a regulatory obligation,” said Mark Steadman, executive director of product development and change management at DTCC.

In many cases, the beneficiary firms can also delegate reporting obligations to the agent lender or a tri-party agent. Speaking on the sidelines of the summit, Steadman further explained that although an agent lender holds all the data necessary to report on its beneficiary’s behalf, there is a remaining operational challenge to overcome. As agent lenders have never had to report before, the entities largely remain siloed from other divisions such as the investment bank or regulatory departments.

A Cautionary Tale of Delegated Reporting

Another concern that has warranted attention from industry experts is the number of delegated relationships counterparty firms onboard. Deloitte’s Abdullah cautioned firms about overcomplicating the compliance process by delegating their reporting requirements to multiple agent lenders, as in each case, the individual agent lender will only handle the trades they are delegated.

“So if you have three agent lenders, you have three delegated reporting arrangements, three sets of data, three sets of oversight processes and three sets of reconciliations just there and then. So you have to be careful about how you run the delegated arrangement and how they are set up. You can’t delegate responsibility—that is still with you,” the counterpart, he explained.

The idea is that firms delegating their reporting to an agent lender or tri-party firm will need to have the necessary support systems to monitor the reporting activity and ensure it is done in an accurate and timely manner. Similarly, when outsourcing to a third-party vendor, counterparty firms must approach their requirements with the same due diligence as they would if using in-house reporting systems.

“If you ask the question, ‘What are the pros and cons of delegated reporting?’, I would say the pro is that someone else is reporting on your behalf, and the con is that someone else is reporting on your behalf. It’s as technical as that—delegated reporting means your control framework is likely to be more complicated and as a trade repository, we are seeing the regulators come to us for access to our data as well as data from the buy-side,” said Steadman.