Navigating theSFTR road ahead

Practice Insight surveys in-house compliance managers and directorswho reveal their SFTR implementation plans and challenges.

April 2019

ANALYSING HOW FINANCIAL INSTITUTIONSARE REACTING TO CAPITAL MARKETS RULES

NO ONE ELSE IN THEMARKET DOES THIS

IFLR Practice Insight is a publication from Euromoney Institutional Investor PLC.

The news service for financial institutions, law firms and trading platforms.

The increasing amount and complexity of new regulation makes it difficult for the industry to keep up with and interpret. Practice Insight is the first publication with a sole focus on uncovering regulatory-driven uncertainty within financial institutions.

Our analysts have access to an invaluable network of in-house legal teams, asset managers, regulatory specialists, exchanges and trading platforms. This allows Practice Insight to build consensus on issues that are complex, granular, and often highly politicised – giving your team the market insight no one else has been able to provide.

For more information visit www.IFLRPracticeInsight.comAlternatively call +44 (0) 20 7779 8626 or email helpdesk@IFLRPracticeInsight.com

SPECIAL REPORT: PART ONE

Market says it’s ready for SFTR

3

After a long journey with European regulators, the greatlyanticipated Securities Financing Transaction Reporting (SFTR)is set to be going live in the second quarter of next year.

Most respondents are ready for its implementation, but this is metwith scepticism as some sources think its complexities are not fullyunderstood by the market.

Here, Practice Insight uncovers how investment banks, non-financial corporations and compliance teams are handling the datarequirements, budgetary constraints and resource management inpreparation of SFTR’s go-live date.

Leave sooner, drive slower, live longer

As the survey shows, the majority of the respondents are ready forSFTR, while 27% are not sure, and 20% aren’t ready at all.

“From our perspective we are seeing early engagement and interestin the SFTR, and the numbers in our taskforce are increasingsignificantly,” says a director of market practice and regulatory policyat an industry group.

Over 100 firms are represented in the taskforce by more than 400individuals. FIX Trading has also set up a working group. The industrygroup sources says this is a great start, and much better than hisexperience with past regulations.

“I think the market has learnt its lesson. Rushing to get preparedon the go-live date is not ideal, which was the case for the EuropeanMarkets and Infrastructure Regulation (Emir),” he adds.

Although 53% of market participants say they feel prepared andare actively taking part in working groups, other market sources arehighly sceptical of the level of awareness and in-depth knowledge.

“I think there’s an element of over-confidence about the readinessand resources being dedicated to SFTR,” says a compliance managerat a bank in London. This may be due to the nature of the regulation,which seems simple on the surface, but is actually incredibly complex.

He has seen various training programmes where audienceengagement is minimal, as most of them are scribbling down everyword that the panellists utter, struggling to keep up.

“It’s easy to underestimate the size and scale of a firm’s obligations,and the nature of some of the transactions and lifecycle events toreport,” he adds.

Jonathan Lee, senior regulatory reportingspecialist at Kaizen, thinks firms should beleveraging resources across the industry tocome up with some form of best practice.

“I have not seen so much evidence thatelectro affirmations, trade matching and otherareas are in place today,” he adds.

The importance of a rear-viewmirror

The number of survey respondents spikedafter the final publication of the regulation inthe official journal of the EU. The final figureof those allocating resources to SFTR projectsalso increased.

Most survey respondents are allocatingresources towards the project. “I think peoplewere holding back until it was fullypublished,” says the compliance manager.“Now they can start dedicating theappropriate level of resources,” he adds.

But many are also being forced to doubledown on other regulatory compliance projectssince the Financial Conduct Authority’s (FCA)crackdown on Mifid II reporting failures.

“It’s not that the UK regulator is stricter –it’s the way the regulation evolves,” says amanaging director at a US bank in London.“Not putting the right amount of resources,attention, time and focus on itsimplementation is what has tripped firms upon Mifid, which has spooked somecompliance managers,” he adds.

There are concerns about the level ofpressure on operations and compliancemanagers to ensure appropriate levels ofcontrol and quality assurance. “Particularlysince senior managers need to be comfortablein accordance with the SMCR [SeniorManagers’ Certification Regime],” says Lee.

It’s not just the professional and financialresponsibility that worries managers under theSMCR. It’s also a criminal responsibility. “It’sa major undertaking for these individuals,who will have no bones about drillingoperations managers to ensure they have theappropriate levels of quality control forreporting,” adds Lee.

The managing director thinks the failuresin Mifid compliance are also down to marketpractice, as too many people feel that the UKregulator “was like everyone else – far toodistracted by Brexit”.

But in practice, the FCA is keen onensuring a high standard of regulatorycompliance, and is ready to pursueenforcement action.

“It’s not enough to show past regulatorycompliance and performance. Firms must alsofocus on future performance,” says thecompliance manager.

Financial institutions cannot rely on

having the requisite resources in place prior tothe regulation coming into effect. They alsoneed a team to oversee it after the go-live date.

There are also operational processes toconsider when implementing SFTR. “It’s not asmall number of people you need,” says Lee.Firms will need developers, business analysts,project managers, subject matter experts andoperations analysts and managers, to name a few.

“Although some firms are deployingresources, in most cases it’s not enough,” addsLee.

Essentially, market participants need tomake sure they are balancing SFTRimplementation with other projects.

Swerving obstacles

However, most survey respondents do nothave any other projects that clash with theimplementation of SFTR. “This is probablybecause it’s quite a niche subject area,requiring a specific set of skills that may onlybe dedicated to just this project alone,” saysthe managing director.

SFTR is indeed quite technical, with somespecialists contracted to focus only on thissecurities financing regulation. The onlyclosest regulatory project in place at themoment is the Central SecuritiesDepositories Regulation (CSDR). Eventhen, some teams are so siloed that SFTRteams do not even know about CSDR andvice-versa.

Of those that are balancing implementationwith other projects, the top distractors areBrexit, Emir 2.2 and developments in Mifid II,particularly since the enforcement letters.

“The onslaught of new regulations comingin at the same time means teams are hugelystretched,” says Lee.

SPECIAL REPORT: PART ONE

Not sure 14.3%No 7.1%

Yes 78.6%

2. Have you allocated resources for SFTR?

No 20%

Not sure 26.7%

1. Is your firm prepared for SFTR?

Yes 53.3%Yes No Not sure

3. Are there any other projects you are working on affecting the distribution of resources to SFTR?

0

10

20

30

40

50

Results shown as percentages

4

“From ourperspective we areseeing early

engagement andinterest in the SFTR,and the numbers inour taskforce areincreasingsignificantly”

Road works ahead

Most respondents’ greatest SFTR challengeis data sharing, which took 29% of thevote. This may be down to marketparticipants’ views on agent lenderdisclosures (ALD).

This new method of reporting posesadditional questions for front office teams, asit may lead to the discovery of beneficiaryinformation that should not be disclosed.

If this information is out there, it mayaffect the capital ratio and risk calculations.“From a securities lending perspective, wepreviously lived in a world where a large partof it was agent-lenders being unable todisclose the underlying beneficial owners,”says Tom Pikett, trade and transparencyproduct manager at Trax.

He understands that all agent lenders keepthis information confidential, but underSFTR, this can be identified through theirlegal entity identifiers (LEI).

Pikett says agent lenders need to focus onoperational changes. This is because “theydon’t have an obligation to report the data,and have little, if any, experience oftransaction reporting”.

“There needs to be a new process toinform the borrower of the beneficiary on thetrade date (T) – but maybe T plus 1,” saysSimon Davies, a senior consultant atboutique clearing consultancy Field Effect.He feels that that borrowers need to see whothe beneficiary is on the books and records,“as many agents don’t reflect that in the ALDrecord”.

This can lead to reporting breaks as theborrower will not be able to meet its reportingobligation on time if the agent uses thecurrent agent lending disclosure (ALD)

process to disclose the beneficiary to the tradespost-settlement.

A lack of resources comes in second with21%, which is somewhat surprising when setagainst question two on resource allocation.While technology, budgets and delegatedreporting obtained 7.1% each – all of whichare linked to resources.

“Perhaps people are looking intoresourcing more, but it’s a struggle to employthe right people as there are very few out therethat have this subject matter knowledge,” saysthe compliance manager.

Grappling with 153 data fields took 14%of the vote. “I think getting that data issomething firms still have to think ofinternally when they’re build the controlframeworks, so people are aware of what toreport,” he adds.

Back-loading trades, variation marginingand the unique trade identifier (UTI) areother key concepts that firms findchallenging.

Revving the engine

Most survey respondents have not noticed anychanges in the volume of new securitiesissuances, but this may be due, at least in part,to the regulation’s very recent addition to theEU official journal.

It could also be down to the makeup ofsurvey respondents. Most are compliance andoperations teams, rather than front office orclient-facing.

With that in mind, some respondentsanswered ‘yes’ to the question of increasingtheir issuance of securities lendinginstruments.

This may be in a similar vein to the

consequences of the SecuritisationRegulation, where market participants issuedmore deals towards the end of last year beforethe rules took full effect.

Stop sign ahead

Sixty-four percent of respondents think theSFTR will affect new issuance once it is inplace.

“It’s difficult to say outright, but I thinkthat from our perspective, it’ll be based on acost-factor basis as the regulation coming inmay make SFTs more expensive in the EU,”says the director of market practice andregulatory policy at an industry group.

“But I don’t think it’ll have the same effecton the repo [repurchase agreements] side,” headds.

“There is more of a concern for securitieslending as this may not be a counterparties’bread and butter activity, and some firms willcut it off if it becomes too expensive,” says themanaging director.

Not one respondent answered ‘no’,although 36% are not sure.

It is quite telling that none of thesurveyed market participants feel confidentenough to say that firms’ SFT volumes willnot be affected by the regulation.

Sharp brake

Half of all respondents disagree with the tradeassociation’s director of market practice andregulatory policy and think repos will be themost affected by SFTR.

“I’ve had conversations with people on thebuyside who are reticent to move forward on

SPECIAL REPORT: PART ONE

5

Yes,we areissuingmore

Yes,we areissuing

less

No,there hasbeen nochange

7. Has the regulation affected your firm’s issuance of securities lending instruments?

0

10

20

30

40

50

Results shown as percentages

N/A

The 153 data fields14.3%

Technology7.1%

Delegated reporting 7.1%

5. What are your greatest SFTR challenges?

Lack ofresources

21.4%

Budgets 7.1%

Data sharingprocedures 28.6%

Other 14.3%

Not sure35.7%

8. Do you think SFTR will affect the volume of issuance in securities after it is in place?

Yes 64.3%

the repo side,” says Camille McKelvy, head ofTrax matching strategy. This may be due tothe manual and bilateral nature of the repomarket.

“Repos never even had regulatoryreporting requirements since this regulation,”says the compliance manager.

Two years ago, virtually no repo deals werecompleted electronically. This means thatcosts will be spread between the dealer and thebuyside community to adopt mechanismsthat can automate process trading for repos.

“But now, we see repo teams doing moreand more transactions via our platform,” saysa repo product specialist at a London tradingvenue.

The demand for trading venues is comingfrom big banks, asset managers, hedge funds

and pension funds, according to the specialist.This market may find compliance with SFTReasier if it migrates its activity onto tradingvenues.

Securities lending activities placed secondwith 36% of the vote, which seems to indicatethat respondents agree with the idea that SFTsmay become more expensive.

No L-plate in sight

Throughout the survey, respondents seemto have answered relatively positively interms of readiness and preparedness.

However, there is always room to learn.Repo counterparties, fund managers andsecurities lending financial firms need to

talk to non-financials and corporates tofully understand the SFTR’s impact.

Equally important, and at timesoverlooked, are the prime brokers, whoneed to collaborate with others in theindustry to obtain greater clarity arounddisclosure and collateral use in marginlending.

Forming more taskforces and workinggroups will help shape market practice,especially with help from trade associationslike the International Securities LendingAssociation, the International CapitalMarket Association and FIX Trading.

It seems as though respondents areconfidently navigating the road to SFTR’simplementation. Hopefully that means nosurprises next year.

SPECIAL REPORT: PART ONE

6

Sell/buy-backtransactions 7.1%

10. Which of the securities will be affected the most by SFTR?

Repurchaseagreements(repos)50%

Securitieslendingactivities35.7%

Other 14.3%

“I think there’s anelement of over-

confidence about thereadiness andresources being

dedicated to SFTR”

Yes No

9. Do you feel confident in your implementation of your SFTR project?

0

10

20

30

40

50

60

Results shown as percentages

Not sure

ANALYSING HOW FINANCIAL INSTITUTIONSARE REACTING TO CAPITAL MARKETS RULES

NO ONE ELSE IN THEMARKET DOES THIS

IFLR Practice Insight is a publication from Euromoney Institutional Investor PLC.

The news service for financial institutions, law firms and trading platforms.

The increasing amount and complexity of new regulation makes it difficult for the industry to keep up with and interpret. Practice Insight is the first publication with a sole focus on uncovering regulatory-driven uncertainty within financial institutions.

Our analysts have access to an invaluable network of in-house legal teams, asset managers, regulatory specialists, exchanges and trading platforms. This allows Practice Insight to build consensus on issues that are complex, granular, and often highly politicised – giving your team the market insight no one else has been able to provide.

For more information visit www.IFLRPracticeInsight.comAlternatively call +44 (0) 20 7779 8626 or email helpdesk@IFLRPracticeInsight.com