There is a growing concern that market participants are not going to be ready to report their securities finance transactions when regulatory obligations start next year. The reporting of trades by banks under SFTR (Securities Finance Transaction Regulation) Article 4 commences in April 2020 and, while buy-side firms' direct reporting requirements do not kick off until October, levels of readiness are, for the most part, significantly lower.

Article 4 of SFTR mandates that repos, securities loans/ borrows, buy-sellbacks / sell-buybacks and commodities finance trades in all asset classes where one counterparty has a legal presence in the EU (including third-country entities of EU-domiciled firms) are reported to an ESMA-approved trade repository shortly after their conclusion.

What this means in practice is that details of the principal leg are reported by the close of business the day after the transaction is executed, and collateral positions are disclosed by the end of the day following settlement. The challenge here is difficult to overstate, with up to 155 fields needing to be reported across all SFTs - and not just for new trades. Any lifecycle event (e.g. re-rates, change of principal, collateral updates) occurring during the term of the transaction must also be captured and reported each day.

Many of these fields must match with details reported by the counterparty, which requires the bilateral exchange of static and trade data to ensure, for example, that both reflect the trade as having been agreed under the same legal agreement, against the same pair of legal entities and that the economics align. There is also a backloading requirement for transactions which have been open for 180 days on first reporting date.

For some firms, SFTR projects have been running in earnest since the summer of 2017, and the good news is that the largest players in these markets (agent lenders and prime brokers) have broadly squared up to the challenge with regional banks and major buy-side institutions now executing on their plans. For many, this means investing in the upgrades to core systems and signing up to solutions which allow the timely sharing of information so that they and their counterparties may accurately report. Some firms, however, are only now beginning to think about putting plans in place.

While some banks will offer a delegated reporting functionality which can reduce the preparatory efforts required for the buy-side firm, oversight of on-behalf reporting remains key as the regulatory responsibility itself cannot be delegated.

IHS Markit and Pirum (the leading securities finance post-trade provider) have been developing a state of the art fully hosted securities finance transaction reporting solution since 2016, building upon respective industry leading data & analytics and reconciliation platforms, which process over $2.4tn of outstandings across 4mm trades each day for more than 600 market participants

Over 60 clients and partners, including the world's largest banks and securities finance infrastructure providers, have signed multi-year commitments to use the centralised service which aggregates, shares, enriches and reconciles transactions, building upon seamless connectivity to triparty agents, CCPs and platforms. For more information regarding the requirements and the IHS Markit & Pirum, solution, please click here.

Buy-side firms need to ensure that they can supply their counterparties with sufficient information to enable reporting. At a bare minimum, this will be active LEI codes for the contracting entity. For firms acting on behalf of multiple underlying entities (e.g. UCITS managers, insurance companies, funds with their own lending programs), information on the end counterparty to the transaction must be made available to the bank on the other side of the trade. These details may be shared via a solution, or on a manual bilateral basis, writing to the technical specifications of the bank.

Anecdotally, firms have been saying of their trading activity that where the price is the same or similar, they will favour counterparties who facilitate their own reporting.

Given the last-minute drama preceding both EMIR and MiFID II, firms would be wise to take decisions regarding the path to compliance sooner rather than later, especially as there are just 196 working days before bank reporting requirements commence.

System integration testing for users of the IHS Markit / Pirum solution has been underway since April and there are forty business days before user acceptance testing begins at the start of September, giving clients the opportunity to use the pre-production environment for six full months before the first bank trades are reported in April (in order to ensure any backloading requirements may be met). This time allows the identification of booking model practices which will need to change to avoid breaks at the TR, and industry groups are already working on new best practices to minimise the risk that transactions like evergreen or extendable repos (which may be booked very differently in front office systems from one firm to another) create ongoing problems.

There are now just eight working weeks before UAT begins for clients and given these weeks span the summer holiday period and the fact that legal contracts must be agreed (a process typically taking 2-6 weeks) before data can be onboarded (another 3-5 weeks), time is very much of the essence.

For more information visit IHS Markit SFTR (Securities Financing Transactions Regulation) Solution.

Posted 8 July 2019 by Stephen Grady, IHS Markit

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.