In late July, UnaVista, the regulatory reporting arm of London Stock Exchange Group, announced plans to close its Securities Financing Transactions Regulation (SFTR) service on January 31, 2022, making it the industry’s latest casualty in a battle with high running costs and wafer-thin margins.

The past two years have seen multiple providers in the regulatory reporting space roll back or offload their services—most notably Deutsche Börse’s sale of its Regulatory Reporting Hub to MarketAxess, and CME’s Nex Abide unwind—due to difficulties in remaining competitive and turning a profit from these entities.

The shuttering of Unavista’s SFTR business has led some industry participants to question whether providing services around this regulation is economically sustainable.

Tom Wieczorek, head of global product management at UnaVista, tells WatersTechnology that following an annual review, LSEG decided to refocus efforts on its more successful reg reporting products, including those that cover the European Market Infrastructure Regulation (Emir) and the Markets in Financial Instruments Regulation (Mifir).

“Despite having quite a competitive offering within the space, we simply didn’t get enough market share of what ended up being a smaller market than the industry expected to make a difference. So we decided to use those resources to make the offerings where we are really leading the market. So it’s just a reshuffling of our resources within the portfolio of products and services that we provide,” Wieczorek says.

Sources at regulatory reporting vendors say that prior to SFTR taking effect in July 2020, volumes of reported transactions were much lower than expected. In the lead-up to the implementation, Wieczorek says, many vendors were confused about whether regulated entities would be expected to report intraday or end of day. Vendors calculated prospective revenues based on expected intraday reporting, but SFTR as implemented requires only end-of-day reporting.

John Kernan, chief executive of Regis-TR UK, says: “After several years of going to conferences where the International Securities Lending Association or the International Capital Markets Association spoke on SFTR many times, everybody was expecting many multiples of what we’ve actually seen when reporting went live.”

As UnaVista’s pricing model is calculated per message, Wieczorek says, lower volumes meant the company would have had to significantly raise its fees to continue running the service, a decision that would have made the product less competitive in a market that is already battling thin margins.

As WatersTechnology’s reporting has documented over the past two years, a consensus among industry sources is that regulatory reporting is an increasingly difficult business in which to thrive, especially for regulated entities such as trade repositories (TRs) owing to their commercial limitations. Under Emir, all pricing for TR services must be made publicly available and approved by the European Securities and Markets Authority (Esma).

Kernan says TRs are not only hamstrung by the restrictions that come with being a licensed entity, they must also compete with unregulated intermediaries that have more commercial freedom. Unlike third-party vendors, for instance, TR’s Emir requirements render them unable to develop new services with the data they collect or to cross-subsidize product lines.

Kernan says firms don’t go into the TR business to make money. In the case of Regis-TR, which is jointly owned by Deutsche Börse Group and BME, he says the TR is considered a complementary service to its pre- and post-trade business, Clearstream.

The roadmap

Emir portability guidelines set out by Esma and adopted by the UK’s Financial Conduct Authority (FCA) specify that TRs must provide the regulator and all TR participants with at least six months’ notice of an intention to shut down the service. Wieczorek says LSEG had to alert the industry now rather than later to avoid clashing with other upcoming changes to SFTR validation rules due to come into force after January 31, 2022.  

“We have to do it now so that we have the six-month timeline that Esma mandates, and so that period finishes prior to the technical standard changes coming on February 1. This way, firms can move and work with their new trade repository on the new technical standards. We felt this would be the best way for the reporting firms to make the switch,” he says.

LSEG first notified its clients of the closure plans in the last week of July. By that point, Wieczorek says it had already discussed the decision with both Esma and the FCA. However, many regulatory businesses spoken to for this story by WatersTechnology say they first learned of the decision to close the SFTR unit from media reports published on July 30.

The portability guidelines are intended to ensure that no reporting data is compromised or lost when firms switch from one TR to another. Wieczorek says LSEG learned a lot from last year’s CME wind-down, and will follow Esma’s standard process for migrating the data to a new provider while also providing clients with material to help them choose vendors and TRs. The information will include comparisons between UnaVista’s services and those of other providers to help clients carry out due diligence when deciding where to go.

Once a client makes its decision, UnaVista, the new TR, the client, and any other third parties will need to work together to first transfer all open trades to the new TR, followed by historical trades.

Wieczorek expects UnaVista and its counterparties to be able to start the transfer process by mid-September.

The UnaVista SFTR wind-down will be on a much smaller scale than that of CME, which shut down multiple regulatory reporting businesses for Emir, including several TRs. SFTR reporting only began in mid-2020, while counterparties to over-the-counter derivatives trades have been reporting to Emir since 2012. There’s simply been less time for a large volume of historical reports to accumulate.

“It will be less disruptive than a CME switchover, as they were covering a few different regimes, such as Mifir, Emir, and others, so the scope was wider than here,” says Ronen Kertis, head of global regulatory reporting at IHS Markit.

On the other hand, Kernan says, late movers could risk the same fate as those that took too long to move during the CME wind-down. An Esma report published in April 2021 says several counterparties were slow to select a new provider during the CME transfer window and regulators had to intervene to speed up the selection process.

“We have previous experience with Emir, and, for me, the key is the project management approach, and doing it in a coordinated and orderly fashion. If it can be done in that way, where not everything’s last minute, with all the clients and huge amounts of data being ported at the same time, and it’s done in an orderly fashion, it should be okay,” Kernan adds.

A spokesperson for the Depository Trust & Clearing Corporation says it will continue to support SFTR reporting. “We are working closely with UnaVista to ensure a smooth transition for those firms that opt to leverage DTCC’s EU or UK repository for their SFTR reporting needs. DTCC operates the largest trade repository for SFTR reporting, processing over 115 million messages a month for over 800 clients,” the spokesperson says.

The future state

UnaVista’s departure from the SFTR business, plus the mounting cost pressures and lower-than-anticipated revenues, has caused some to question the viability of the SFTR regime itself. Several sources spoken to for this story say the regulation is economically unviable as it exists today, due to the high operating costs and low return on revenue. Some fear that other providers, particularly the remaining TRs registered for SFTR reporting in Europe—the DTCC, Regis-TR, and KDPW in Poland—could decide to follow suit and exit the market.

“As more and more vendors stop providing reporting services to financial firms, as we have seen with CME, Deutsche Börse, and most recently LSEG and their SFTR trade repository, choice across the market will diminish and new entrants are unlikely to emerge if there’s a low commercial incentive to do so. This is certainly what we are seeing. As a result, it might become increasingly difficult for the regulator to enforce compliance,” says Matt Smith, CEO of compliance technology provider SteelEye.

For several years, there has been debate over whether a single TR would be better suited for Emir and SFTR, rather than the current situation where several firms compete for business but operate under strict commercial conditions.

Kernan says competition is good for innovation, despite the limitations inherent in running a TR.

Kertis doesn’t believe that a single TR will emerge, but admits he also failed to predict some of the changes the industry has witnessed over the past two years. “The existing players are robust and, as far as I know, it is not an insignificant business for them. So I think there will be stability. But, having said this, business is business, and sometimes decisions are made for reasons that are unrelated to that particular business,” he adds.

SteelEye’s Smith says that if a utility TR were to arise, it would have to be run by regulators. A potential concern is that a single utility operated by a business would have a monopoly on reporting fees and little incentive to improve the service.

Wieczorek says he sees TRs as an extension of the regulator, as in jurisdictions such as Switzerland the regulator nominates a provider—SIX in the case of the Swiss domestic market —to collect the data on its behalf. Whether this is a plausible option for the European or UK market is unknown. Some argue that competition is necessary, others say the regulation is unsustainable, but most agree that the commercial environment for regulatory reporting businesses is crying out for change.

What that change might look like, however, is unclear. 

“I think it’s inevitable there will be some sort of regulatory or technological breakthrough that will disrupt the landscape, and everybody will reshuffle again and fight for their own new market share,” says Wieczorek.