To me, to EU
10 January 2017
The first year under SFTR has seen a sophisticated dialogue develop between ESMA and the market, which could set the standard for the future
Image: Shutterstock
The 网爆吃瓜 Financing Transaction Regulation (SFTR), which began its implementation process in January 2016, will receive its final technical standards in Q1 2017 and the 12-month window to prepare for phase one will begin to close.
The new framework, aimed at improving market transparency, still has some features under construction as others come into effect, meaning the European 网爆吃瓜 and Markets Authority (ESMA) is still receiving a plethora of comment letters from market participants seeking greater clarity on upcoming standards.
SFTR will require UCITS and alternative investment funds to report their use of securities financing transactions and total return swaps in the annual report of every UCITS or alternative investment fund under management, and in each six-monthly report for UCITS.
This information must be included in the first annual or six-monthly report published after 13 January 2017, although this may include a reporting period beginning before January.
A review of the first year of business under the SFTR umbrella reveals the emergence of a strong relationship between ESMA and market representatives. The ongoing negotiations included multiple consultations and redrafts as ESMA has involved interested parties at each stage of the process, instead of simply passing down a tablet of new commandments from on high. The collaborative process has allowed for all parties to express their respective aims of market stability and business continuity.
The market speaks
Following the first January 2016 implementation date, the International Capital Market Association (ICMA) published a statement calling on the regulator not to overreach in its reporting requirements at the risk of straying into collecting redundant information or overlapping with existing reporting frameworks.
鈥淲hile we acknowledge and welcome the explicit exemption from Markets in Financial Instruments Regulation (MiFIR) reporting requirements of all transactions that will be reported under SFTR, we also note that this exemption does not extend to SFTs that have been explicitly exempted from SFTR reporting, in particular SFTs with European System of Central Banks counterparties,鈥� ICMA explained in its statement.
鈥淲e strongly disagree with this approach as we believe that the SFTR provides the only appropriate framework to report SFTs and that the inclusion of the aforementioned transactions in MiFIR transaction reporting goes against the clear political decision to exempt these trades from SFTR reporting obligations,鈥� ICMA added.
The potential for inconsistencies in technical terms and standards across similar reporting regulations also featured prominently in the list of concerns initially raised by industry bodies.
The International 网爆吃瓜 Lending Association (ISLA) submitted its own response letter to the Financial Stability Board鈥檚 (FSB) proposal for implementing stability measures for the 鈥榮hadow banking鈥� sector, in which it highlights inconsistencies between ESMA鈥檚 and the FSB鈥檚 definition of certain aspects of the securities lending market.
And the regulator listens
After receiving a deluge of industry comment, a well-informed ESMA smartly sidestepped one of the industry鈥檚 worst fears of creating a 鈥榤ajor liquidity issue鈥� by revising its collateral reporting rules in its second-level consultation, published in October 2016.
Specifically, the requirement to report on collateral used as part of an SFT on a T+1 basis was amended to make the deadline for reporting the day after value date.
Ben Challice, COO at Pirum Systems, explained: 鈥淐learly you don鈥檛 know what you鈥檙e going to use as collateral until the value date of the collateral requirement.鈥�
He said: 鈥淓SMA seems to have listened to the market and now acknowledges that to lock up collateral before moving it would create major liquidity issues in the market.鈥�
鈥淭hey have now proposed that it can be reported on value date plus one for non-cash trades (pending further consultation).鈥�
ESMA acknowledged that it had learned much since it first began drafting the reporting standards for the European Market Infrastructure Regulation (EMIR), on which SFTR鈥檚 own requirements are largely based, and saw the need for improvements as a result.
鈥淸The authority] understands that with the exception of trades against a collateral basket both counterparties will have agreed the collateral for an SFT at the time the SFT is concluded or at the latest at the end of the day on which the SFT is concluded,鈥� explained ESMA in its September 2016 consultation paper.
鈥淔or repo trades against a collateral basket, the counterparties would report the collateral allocation as soon as it is known, but at the latest at the end of the value date plus one.鈥�
ESMA also used the second-level consultation to respond to the market鈥檚 concerns around consistency and reiterated its aim to 鈥渆nsure a level playing field鈥� for market participants鈥� access rules and 鈥渁lign reporting standards to the maximum extent possible鈥� across the various EU reporting regimes.
According to ESMA, this required two amendments to EMIR鈥檚 technical standards on reporting, plus detailing the operational standards for data access, comparison and aggregation. Although SFTR and EMIR are primarily focused on the EU, the nature of the reporting requirements will affect global entities that interact with the EU market for securities lending activities.
Fran Garritt, director of securities lending and market risk for the Risk Management Association (RMA), said: 鈥淭he RMA 网爆吃瓜 Lending Committee is monitoring SFTR as many US agent lenders and beneficial owners will be impacted by SFTR reporting rules due to the global nature of the business. Most US agent lenders service European clients, and both US agent lenders and beneficial owners lend both to European counterparties and European securities.鈥�
The feedback ESMA received from this consultation will now be used to form the draft technical standards. They will be submitted to the European Commission by the end of Q1 2017. The final version of SFTR will come into force from 2018.
The market responds
Before this happens, market participants should take note of the various vendor solutions that are being released to help tackle SFTR鈥檚 reporting requirements.
IHS Markit鈥檚 fully hosted data and reporting solution provides the foundation needed to reconcile trading activity down to the unique trade and legal entity identifier (UTI and LEI) level of granularity. It also offers turnkey connectivity to trade repositories.
Features include a trade warehouse that pulls data from multiple sources and provides a standardised copy of all trading and collateral activity.
A real-time module reconciles trades and creates the SFTR mandated-UTIs at the LEI level, with a full audit trail of the process including matching status reports.
IHS Markit鈥檚 solution is the latest in a line being rolled out to deal with the SFTR reporting requirements. According to post-trade provider Pirum, SFTR reporting will be on a T+1 basis in line with existing regulatory reporting regimes.
It mandates two-sided reporting, with both the collateral giver and taker required to report their side of the trade to a registered repository.
As part of the two-sided reporting obligation, a UTI must be included in their reports. 鈥淭his value will be used by the trade repositories to match separately received reports from each counterpart to [a trade],鈥� Pirum explained.
Pirum is leveraging its existing contract compare functionality to generate the UTIs needed for transaction reporting. It promises that generating UTIs from positions matched in Pirum will ensure that trades submitted to repositories will have a higher matching rate once reconciled, reducing the amount of incorrect reports that counterparts need to review.
EquiLend recently revealed that it too is working on a solution to meet the reporting requirements for trades and collateral under SFTR. It is talking to market participants to gauge how best to tackle the requirements.
The trading and post-trade service provider already captures much of the information required by SFTR, meaning it can create the UTI immediately either at the point of trade or during the post-trade comparison process.
The new framework, aimed at improving market transparency, still has some features under construction as others come into effect, meaning the European 网爆吃瓜 and Markets Authority (ESMA) is still receiving a plethora of comment letters from market participants seeking greater clarity on upcoming standards.
SFTR will require UCITS and alternative investment funds to report their use of securities financing transactions and total return swaps in the annual report of every UCITS or alternative investment fund under management, and in each six-monthly report for UCITS.
This information must be included in the first annual or six-monthly report published after 13 January 2017, although this may include a reporting period beginning before January.
A review of the first year of business under the SFTR umbrella reveals the emergence of a strong relationship between ESMA and market representatives. The ongoing negotiations included multiple consultations and redrafts as ESMA has involved interested parties at each stage of the process, instead of simply passing down a tablet of new commandments from on high. The collaborative process has allowed for all parties to express their respective aims of market stability and business continuity.
The market speaks
Following the first January 2016 implementation date, the International Capital Market Association (ICMA) published a statement calling on the regulator not to overreach in its reporting requirements at the risk of straying into collecting redundant information or overlapping with existing reporting frameworks.
鈥淲hile we acknowledge and welcome the explicit exemption from Markets in Financial Instruments Regulation (MiFIR) reporting requirements of all transactions that will be reported under SFTR, we also note that this exemption does not extend to SFTs that have been explicitly exempted from SFTR reporting, in particular SFTs with European System of Central Banks counterparties,鈥� ICMA explained in its statement.
鈥淲e strongly disagree with this approach as we believe that the SFTR provides the only appropriate framework to report SFTs and that the inclusion of the aforementioned transactions in MiFIR transaction reporting goes against the clear political decision to exempt these trades from SFTR reporting obligations,鈥� ICMA added.
The potential for inconsistencies in technical terms and standards across similar reporting regulations also featured prominently in the list of concerns initially raised by industry bodies.
The International 网爆吃瓜 Lending Association (ISLA) submitted its own response letter to the Financial Stability Board鈥檚 (FSB) proposal for implementing stability measures for the 鈥榮hadow banking鈥� sector, in which it highlights inconsistencies between ESMA鈥檚 and the FSB鈥檚 definition of certain aspects of the securities lending market.
And the regulator listens
After receiving a deluge of industry comment, a well-informed ESMA smartly sidestepped one of the industry鈥檚 worst fears of creating a 鈥榤ajor liquidity issue鈥� by revising its collateral reporting rules in its second-level consultation, published in October 2016.
Specifically, the requirement to report on collateral used as part of an SFT on a T+1 basis was amended to make the deadline for reporting the day after value date.
Ben Challice, COO at Pirum Systems, explained: 鈥淐learly you don鈥檛 know what you鈥檙e going to use as collateral until the value date of the collateral requirement.鈥�
He said: 鈥淓SMA seems to have listened to the market and now acknowledges that to lock up collateral before moving it would create major liquidity issues in the market.鈥�
鈥淭hey have now proposed that it can be reported on value date plus one for non-cash trades (pending further consultation).鈥�
ESMA acknowledged that it had learned much since it first began drafting the reporting standards for the European Market Infrastructure Regulation (EMIR), on which SFTR鈥檚 own requirements are largely based, and saw the need for improvements as a result.
鈥淸The authority] understands that with the exception of trades against a collateral basket both counterparties will have agreed the collateral for an SFT at the time the SFT is concluded or at the latest at the end of the day on which the SFT is concluded,鈥� explained ESMA in its September 2016 consultation paper.
鈥淔or repo trades against a collateral basket, the counterparties would report the collateral allocation as soon as it is known, but at the latest at the end of the value date plus one.鈥�
ESMA also used the second-level consultation to respond to the market鈥檚 concerns around consistency and reiterated its aim to 鈥渆nsure a level playing field鈥� for market participants鈥� access rules and 鈥渁lign reporting standards to the maximum extent possible鈥� across the various EU reporting regimes.
According to ESMA, this required two amendments to EMIR鈥檚 technical standards on reporting, plus detailing the operational standards for data access, comparison and aggregation. Although SFTR and EMIR are primarily focused on the EU, the nature of the reporting requirements will affect global entities that interact with the EU market for securities lending activities.
Fran Garritt, director of securities lending and market risk for the Risk Management Association (RMA), said: 鈥淭he RMA 网爆吃瓜 Lending Committee is monitoring SFTR as many US agent lenders and beneficial owners will be impacted by SFTR reporting rules due to the global nature of the business. Most US agent lenders service European clients, and both US agent lenders and beneficial owners lend both to European counterparties and European securities.鈥�
The feedback ESMA received from this consultation will now be used to form the draft technical standards. They will be submitted to the European Commission by the end of Q1 2017. The final version of SFTR will come into force from 2018.
The market responds
Before this happens, market participants should take note of the various vendor solutions that are being released to help tackle SFTR鈥檚 reporting requirements.
IHS Markit鈥檚 fully hosted data and reporting solution provides the foundation needed to reconcile trading activity down to the unique trade and legal entity identifier (UTI and LEI) level of granularity. It also offers turnkey connectivity to trade repositories.
Features include a trade warehouse that pulls data from multiple sources and provides a standardised copy of all trading and collateral activity.
A real-time module reconciles trades and creates the SFTR mandated-UTIs at the LEI level, with a full audit trail of the process including matching status reports.
IHS Markit鈥檚 solution is the latest in a line being rolled out to deal with the SFTR reporting requirements. According to post-trade provider Pirum, SFTR reporting will be on a T+1 basis in line with existing regulatory reporting regimes.
It mandates two-sided reporting, with both the collateral giver and taker required to report their side of the trade to a registered repository.
As part of the two-sided reporting obligation, a UTI must be included in their reports. 鈥淭his value will be used by the trade repositories to match separately received reports from each counterpart to [a trade],鈥� Pirum explained.
Pirum is leveraging its existing contract compare functionality to generate the UTIs needed for transaction reporting. It promises that generating UTIs from positions matched in Pirum will ensure that trades submitted to repositories will have a higher matching rate once reconciled, reducing the amount of incorrect reports that counterparts need to review.
EquiLend recently revealed that it too is working on a solution to meet the reporting requirements for trades and collateral under SFTR. It is talking to market participants to gauge how best to tackle the requirements.
The trading and post-trade service provider already captures much of the information required by SFTR, meaning it can create the UTI immediately either at the point of trade or during the post-trade comparison process.
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