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The Latest from the EU: Securities Financing Transactions Regulation (SFTR) is Almost Here
SFTR: Similar to EMIR and MiFID II, but This Time for SFTs
Since the financial crisis, the regulatory landscape for those working in the capital markets and equities industry has changed dramatically. After nearly a decade of constant regulatory change, the process of how new regulation is conceived and promulgated in the European Union is finally becoming familiar to many.
Securities Financing Transactions Regulation (SFTR) is the latest piece of regulation to work its way through the process and is the European Union’s response to the Financial Stability Board’s August 2013 policy proposals on Securities Lending and Repos. The final regulatory technical standards are due to be published and adopted in the second quarter of 2018, and banks and investment firms are likely to have to start reporting from the second quarter of 2019, although this could still be subject to revision even at this late stage.
SFTR shares many features with the EU’s EMIR regulation, as well as some elements of MiFID II, but is aimed at another strategically important OTC market – Securities Financing Transactions (SFTs). This includes four product areas: SBL (Securities and Commodities), Buy/Sell Back, Repo and Margin Lending. If all goes as intended, SFTR will increase the transparency of new transactions, lifecycle events and collateral reuse through disclosure and reporting to the trade repository.
How SFTR Figures to Impact Operations
As with EMIR and MiFID II, one of the key drivers of operational impact is the number of reportable fields required. MiFID requires 65 reporting fields and EMIR requires 85, while SFTR requires a whopping 117 fields for a securities lending trade and 80+ fields for repo transactions. For markets that are highly commoditized and use standardized terms and confirmations such as derivatives, straight-through processing rates will be high and therefore the reporting requirements will in theory tend to be less burdensome.
For a market like securities financing which includes a diverse set of instruments, many transactions are bilateral and bespoke in nature. As a result, STP rates tend to be lower. Couple this with daily and intra-day reconciliation requirements, and this implies some major rethinking of the processes, practices and technology deployed. A glass-half-full response to this could be that SFTR presents the industry with a great opportunity to increase automation and invest in new technology. Changes to existing practices can also help, like enabling pre-trade affirmation for as many fields as possible.
Lifecycle reconciliation is also a challenge given the number of variables, such as linking changes to collateral composition, partial returns and corporate actions.
SFTR also brings the security finance market into line with other OTC markets in terms of reference data and the responsibility for generating Unique Trade Identifiers (UTIs). This can vary depending on the product and a participant’s role in a trade. Capturing Legal Entity Identifiers (LEIs) is also tricky and will be new for some participants who have not yet registered.
All of this suggests that impacted parties need to invest in data management and quality. The requirements on the reuse of collateral will apply to the reuse of securities and other financial instruments provided as collateral under all security and title transfer collateral arrangements, not just SFTs. SFTR imposes conditions on the right to reuse financial instruments provided as collateral.
Under SFTR, all counterparties, not just financial intermediaries, will have the right to reuse financial instruments received under a security or title transfer collateral arrangement only if the risk and consequences have been communicated to the provider and express consent to title transfer has been received.
This will increase the amount of information that is required to be captured and tracked relating to collateral holdings, including the evidence of consent for reuse and that this is reflected in the clients’ securities holding accounts with custodian and tri-party agents.
Impacted firms should not underestimate the work required to achieve SFTR compliance, which may prove to be significant in a market that is not as standardized as those markets that fell under the scope of EMIR and MiFID II.