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SFTR for Asset Managers:

Dealing with the complexity in time

June 2020

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Contents 3

Regulation overview & update

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Buyside considerations

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SFTR programme considerations

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How IHS Markit & Pirum can help?

GetConnected

© Pirum Systems 2020

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SFTR reporting requirements for asset managers, pension and insurance funds along

with hedge funds is due to start in October 2020. There is a huge amount of

complexity and risk involved in complying with the reporting requirements, and here

we give a regulatory update and look at how asset management firms can meet the

deadline.

Currently, the first phase of reporting firms will start in July, after a postponement

of the go-live date by ESMA due to the impact of Cov-19. This has given those

firms an extended period in which to implement the requirements, and here we

look at what challenges phase 3 firms face before they are due to go live in October,

along with some of the lessons learnt already.

Firms are required to report transactions in securities finance trades (SFTs) across

securities lending, repo, buy-side and margin lending books, if they are in scope

entities – so those that are EU entities and any non-EU branch of those entities, or

EU branches of a non-EU entity.

ESMAs guidance published at the beginning of the year appeared to widen the scope

for Hedge fund asset managers, but this has subsequently been clarified by the EU

commission, so that it is now the jurisdiction of the fund that will determine the

reporting requirement.

Regulation overview

& update

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The reporting regime follows similar requirement to EMIR, with both counterparts

to the trade required to report transactions (if in scope) by COB T+1. Additionally,

modifications to those transactions and the associated collateral also need to be

reported (along with other report types), along with the reuse of any collateral from

an SFT used in another SFT. Firms should report the trade using a common Unique

Transaction Identifier (UTI), so one side of the trade will need to generate and share

this with their counterpart for them to report. Firms can delegate the act of

reporting, but not the responsibility, and trades should be reported to a Trade

Repository (TR) who will then reconcile the trade with the counterpart if they are

also in scope for reporting, with the reconciliation of the data fields phased on over

time.

Much has been written about the data required, validation rules and ISO standards

to be followed for report submission, and the volume of data, standards and

reconciliation tolerances that need to be used, along with the requirement to submit

to a TR in ISO standard create significant challenges for firms. Many asset manager

will already be affected by the SFTR requirement for increased transparency to

investors and re-use permissioning, which are already in force, they will now need

to start reporting to Trade Repositories the transactions that they or their agents

undertake, the collateral related to these and any re-use of collateral on a daily basis.

SFTR Implementation timeline

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Many asset managers will either be planning to do their own reporting or

to take advantage of delegated reporting services offered by their agents

or brokers, and they face several challenges related to this. The general

challenges include:

Data sources and quality

There are 155 data fields across 4

tables that need to be reported.

Many firms will have issues with

sourcing the data internally to report

or the quality or consistency of that

data. This broadly falls in to four

categories

Counterparty data

Trade data

Collateral data

Re-use, reinvestment and funding sources –

known as re-use data

Buyside

considerations

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Each pose their own challenges and

the data standards, validation

requirements and ISO transformation

needs to be carefully assessed. There

are also some discrepancies between

the regulatory technical standards

(RTS), validation rules and ISO

standards. Both ICMA and ISLA have

published extensively on these,

following on from a very detailed

period of consultation with the

industry. Their most recent

publications can be found here

ICMA guidance

ISLA guidance

Many asset managers will rely on

agents and brokers to provide

information if they are not leveraging

delegated reporting services in order

to report, and it is likely that the asset

manager will need to generate their

own re-use data. So, reviewing the

source and accessibility / timing of the

data required externally and internally

for the re-use calculation, cash

reinvestment and funding sources will

be critical.

UTI sharing

Like EMIR, firms will need to both

generate and deliver to, or receive a

UTI from their counterpart. The RTS

has a waterfall on who should

generate the UTI, however one step

in that waterfall is that firm can

bilaterally agree on who should do

that. It’s generally expected that agent

lenders will generate this as part of

their agency lending programmes and

it will then be up to firms to negotiate

bilaterally with counterparts if they

want to override the waterfall in

order that they are the UTI generator

– which is often seen as the a simpler

position to be in as its easier to

distribute rather than receive UTIs,

and doesn’t leave you waiting for your

counterpart to deliver the UTI.

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LEI trading impacts

The regulation requires both

counterparts and securities (used for

trading and collateral) to be identified

with a valid Legal Entity Identifier (LEI).

Counterpart information should

largely be available – again following

on from EMIR and also MIFID, this is

now widely required and accepted by

the industry, and all but a handful of

non-EU counterparts should have

one. However, there is a shortfall in

the LEIs available for securities – its

estimated 40% of securities traded

and used for collateral management

by EU entities are missing LEIs. ESMA,

the EU regulator, has provided a 12-

month grace period from April 2020

for non-EU securities, however, EU

securities will be required to have an

LEI by the go-live date. There are

around 10% of EU securities that still

don’t have LEIs today. Both the

validation rules and ISO standards

require this – and without them firms

will not be able to report to their

chosen TR. So, firms must assess if

this will prevent them from trading or

accepting as collateral a security or

non-compliance to the reporting

regime. The former will impact both

trade and collateral permissioning,

particularly regarding Triparty agent

schedules, the later would warrant a

conversation with firms’ regulatory

authorities.

Validation and ISO transformation

Validation rules are reasonably

complex and need to be fully

understood to ensure trade types are

properly reported and accepted by

the TR. Without confirmation from

the TR that the trade as been

acknowledged (Ack’d) then you have

not completed your reporting

obligation. The regulation also

requires that data is submitted to the

TR in ISO 20022 standard. This

posses some additional challenges due

to the structure of the format and

some inbuilt validation – and that it is

currently evolving and likely to

continue to do so for the foreseeable

future. Therefore, both a detailed

understanding and ISO expertise

along with enough time factored into

your project is needed to ensure its

full adopted, with many firms

struggling to grapple with this issue.

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Additionally, asset managers face some specific challenges with their SFTR

reporting requirement.

UTI sharing

There are various steps in deciding

who should generate the UTI.

However, the final step for a repo is

that the collateral taker is required to

generate the UTI (in this context the

security is classed as the collateral), for

securities lending, the borrower is the

final step as the UTI generator –

unless both of these are overridden

by bilateral agreement – so you need

to assess how this will impact you, and

if you want to override it, you will

have to have an outreach workstream

to agree this with counterparts.

Where agent lenders are involved, it

is likely they will generate a UTI on

your behalf, and if using a delegated

reporting facility provided by them

this isn’t likely to provide a challenge,

but if not, you’ll need to ingest those

UTIs and use these to report as they

will have agreed the UTI with the

borrower.

Re-use reporting

Re-use data covers three things: re-

use of collateral from an SFT in an

SFT, cash-reinvestment and sources

of funding. It is unlikely to be able to

delegate this to third parties, as it is

the aggregation of this data that needs

to be reported. Additionally, the re-

use portion requires a calculation

involving the firms assets, which is

unlikely to be available to a third party.

We’re not aware of any firms who

are offering delegated reporting

covering the re-use portion, and

(anecdotally) asset managers are being

advised to report this themselves.

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Delegated reporting

Many agent lenders for securities

lending and brokers for repo

transactions are offering delegated

reporting. It is possible that asset

managers using an external agent, will

have one or more agent lender and

certainly multiple repo counterparts.

So, taking advantage of delegated

reporting will lighten the initial

reporting burden, but due to the

proliferation of services the asset

manager will be left monitoring these

multiple services. Additionally, where

there are multiple delegated services

used, initial contracting and ongoing

monitoring of the service, managing

data gaps and exception handling,

along with ensuring what is reported

to the TR is accurate will need to be

undertaken. Remember, legally you

can delegate the act, not the

responsibility for reporting, and

delegated services with providers

should be carefully reviewed and will

need to be monitored going forward.

Controls framework

Whether using delegated services or

not, firms should carefully review

their control framework – the roles

and responsibilities and both the

breadth and type of controls that are

in place with regard to report

submission to the TR, through to on

going monitoring of their overall

reporting obligations. Controls will

range from gathering comprehensive

business requirements, traceability to

the regulation, ensuring programme

governance for implementation with

on-going manual and automated

preventative and detective processes

to highlight exceptions, and these will

need regular review through internal

and independent audit.

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Any SFTR reporting solution will start with the programme design, and

here we show the high-level requirements firms should be considering:

Once the requirements are established, firms then need to decide how to achieve

these, and identify any vendor solutions and requirements to complement any

internal build. Given the time left to implement any solution before the October

go-live date for asset managers, firms need to look to manage their programme

delivery carefully.

Data analysisData

remediation Data

enrichment

Data validation prior to TR submission

UTI sharing Pre-matchingMessage

formattingISO

transformation

Submission to the TR

Exception handling and

workflow Audit Data storage

TR reconciliation

MIS Testing

SFTR programme

considerations

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What next?

Now with 6 months to go before the

October go-live date for phase 3

firms, including asset managers,

pension and insurance funds, firms

need to be accelerating their SFTR

programme.

As you would expect, we have seen

firms that are in Phase 1 (now July go-

live date) that started early with their

pre-production testing are much

more advanced and ready for the first

go-live date. The earlier testing also

allows them to reconcile data and

start to remediate issues at source,

along with preparing for unexpected

edge cases, or to grapple with some

of the nuances or tweaks to the

regulation from the EU regulator.

The regulation significantly impacts

existing processes – as so many

reportable events are not only

created from the initial report, but

also the day to day life-cycle events.

Additionally, new processes will be

added due to the requirement to

monitor and control the report

submission to the TR. Finally,

depending on the route firms take to

report – doing this themselves or via

delegated reporting services, asset

managers will need to deal with the

exceptions and controls to support

this, and develop workflow processes

and tools to deal with these. So, firms

also need to look at their operating

model, and how SFTR will impact

these existing or new processes.

.

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The joint IHS Markit & Pirum SFTR

solution has unparalleled market

coverage, with an estimated 80% of

the trades requiring a UTI passing

through our platform. This allows

those firms connected, to seamlessly

send and receive UTIs. Our modular

platform allows firms to submit,

transform and enrich data, along with

pre-matching data in order to check

this aligns to the counterpart view and

share information such as collateral

data and agent allocations. In addition,

we can create and transform this to

the required message standards and

then submit this to the firms chosen

TR.

Where counterparts are providing

delegated reporting to their clients on

the platform, we can create a

consolidated view of the data, and

access to their clients to monitor TR

submission and exceptions

throughout the end to end process.

Given the experience we have with

supporting firms with their reporting

requirements, we have been able to

build a comprehensive toolkit, from

initial data analysis, flexible integration,

dedicated on-boarding support and

specialism, testing and workflow

management to support both banks,

clearing houses and asset managers

with their SFTR programmes.

SFTR toolkit

Analysis Integration Support Testing Workflow

How IHS Markit &

Pirum can help?

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SFTR Solution

The joint IHS Markit & Pirum SFTR solution provides a flexible modular

approach to support your SFTR reporting obligation. highlights

The solution highlights include:

• Data validation – Real-time, early view of data quality issues

• Data enrichment – Fills data gaps that you have

• UTI generation & sharing – Generate, ingest and distribute UTIs, even if the

counterpart is not on the platform

• Agent Lender allocations – Near real time allocation information

• Event generation – Creates the correct report / event type

• ISO formatting – Transforms data into the required ISO standard

• TR submission management – Submission to the TR of your choice

In addition,

• Post trade automation – Prevents breaks and increases STP rates

• Workflow – Effective breaks management to reduce time spent on breaks

resolution

Contact us to find out more

GetConnected

SFTR@pirum.com SFTR@IHSMarkit.com

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About Pirum Systems

Every day Pirum manages over $2.1tn worth

of contracts and $1.4tn of collateral, and

achieves over 99% STP for some of the

biggest financial companies in the world.

Pirum Systems Ltd is a world leader in

Securities Finance and OTC derivatives

automation, driving efficiency gains for

almost 20 years. Our position enables

clients to seamlessly access counterparties,

Triparty agents, trading venues, market data

companies and CCPs as well as ensuring

regulatory adherence.

Pirum delivers highly innovative and flexible

services, tailored to fully support the

industry’s complexities and evolving business

processes. We’re experts in helping firms

manage their securities finance and OTC

derivatives business.

For more information visit www.pirum.com

Global Post-Trade Service Provider of the year (2019),

Collateral Connect voted Best Software Solution (2019)

and Best SFTR solution (2020) For more information.

About IHS Markit

IHS Markit (NYSE: INFO) is a world leader

in critical information, analytics and solutions

for the major industries and markets that

drive economies worldwide. The company

delivers next-generation information,

analytics and solutions to customers in

business, finance and government, improving

their operational efficiency and providing

deep insights that lead to well-informed,

confident decisions. IHS Markit has more

than 50,000 business and government

customers, including 80 percent of the

Fortune Global 500 and the world’s leading

financial institutions. Headquartered in

London, IHS Markit is committed to

sustainable, profitable growth.

For more information visit

www.ihsmarkit.com

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