The Devil is in the Details

After a long and protracted process, with multiple layers of consultation and review, the European Commission and Parliament have reached a decision. Not Brexit, of course. At the time of writing, that process is rumbling onward, and not necessarily always in the same direction. Instead, our focus is on another major change affecting many European Union organizations directly, and many others indirectly. Namely, this is the Securities Finance Transaction Regulation or SFTR. Like Brexit, it seems to have been a near-constant source of speculation, discussion and analysis for, what seems like, well, forever.

Finally, the countdown clock is about to start ticking. As of the first or second week of April, the regulation will be published in the Official Journal of the European Union. Twelve months after that, the reporting obligations for the first tranche of market participants begins. With a date set, minds and resources need to focus on being ready in time. Most market participants, as evidenced by the high attendance rates at both ISLA and ICMA SFTR meetings, are well engaged and preparing to meet their reporting obligations. There is a wide range in levels of readiness, however, as some market participants are just embarking on their SFTR journey, while others are at very advanced stages. What all market participants have in common, is a significant amount of work ahead of them. Working backwards from an April 2020 go-live date, taking the most obvious large-scale tasks into account, 12 months suddenly seems like a very short time. The Gantt chart shown as Figure One, represents those high-level blocks with broad estimates of time scales. Taking each of those in turn, the importance of each task can be highlighted.

Confirm Delivery Project Plan

Confirmation of the overall project delivery plan can now be done. With a go-live date set, work now must be done on crystallizing those milestones and marshalling the resources necessary to meet them. In FIS’ view, our clients are moving to the latest versions of our systems to take advantage of not only the latest capabilities, but the SFTR-specific enhancements that we are delivering.

Install Upgraded Software as Required

Whatever system your organization employs, it is likely that an upgrade or an additional module may be required. Getting that work done at your organization is only half the battle – can your provider meet your upgrade needs alongside those of their other clients? From a simple project management point of view, this is potentially a real issue for some.

Data Gathering, Loading and Testing

Data gathering, loading and testing cannot be underestimated. SFTR has added many new data fields for transaction reporting that the securities finance business has simply not had to consider before. These comprise contract details, including versions and signature dates, as well as specific counterparty and security data. Legal Entity Identifier codes (LEI), for example, will have to be sourced, not only for counterparts, but also for the issuers of the securities traded. While EMIR relies heavily on live LEI codes, they are not necessarily the same counterparties that the securities finance business trades with and, as such, there may be no short cut there.

Trade Repository Testing

Connectivity and testing with your chosen Trade Repository (TR) requires selecting one of the many providers in this space sooner rather than later; failing to connect effectively to an authorized TR and understand exactly how that data transfer is going to work could invites project failure at the last hurdle. Again, this is not just a question of resources at your organization. Anecdotes from TRs relay horror stories from EMIR implementation when clients engaged the week before go-live, demanding 5,000 new accounts to be set up.

The Pressure to Get It Right – and On Time

Gathering and managing the data represents only half the task when considering meeting the challenges of SFTR. The logic of what to report and when to report it, including all lifecycle events, is key to successful compliance. This is leading many market participants to examine their existing workflow and the capabilities of their trading systems. For example, if your system is incapable of undertaking some trade amendments or lifecycle events – such as partial returns or re-rates – without closing the original trade and opening a new one, then pairing and matching trades with your counterparties will be a challenge. Both ISLA and ICMA, together with market participant and system vendor committees are working on best practice papers addressing such issues. On that basis, process reengineering may become a very significant part of your SFTR implementation. So much can be said about how to get this implementation right, but the impact of getting it wrong is also bringing the need to comply with SFTR into sharp focus. Three major market participants have recently been given somewhat eyewatering fines for failing to comply accurately with reporting requirements. The origins of SFTR lie with the Financial Stability Board, as implemented by ESMA, and the purpose of these requirements are to monitor, understand and, ultimately, control the market. If participants are not accurately reporting their trade and collateral data, irrespective of their views of the complexity and detail of what is required, then that monitoring cannot be effective. On that basis, it is not surprising that the Financial Conduct Authority (FCA) has been so aggressive in its approach to fining clients. It should not be overlooked that one aspect of a recent fine was for over-reporting trades, which indicates how regulators are pushing the onus very much on to data submitters to be accurate and not expect the trade repositories or the regulator to second guess what to measure. Brexit, whether it occurs or not, is unlikely to have any effect on the implementation of SFTR. It is our understanding that the FCA is planning to adopt SFTR in its entirety irrespective of Brexit, meaning that the UK cannot stand outside of the regulation. Equally, a strategy considered by some participants who are out of scope avoiding any SFTR impact by ceasing to trade with in scope counterparts, is potentially a short-lived solution due to the ongoing roll out of the FSB’s Transparency Directive.

In summary, there is much to do within a shortening timeframe for completing the work. The confirmed timeframes will bring renewed focus, and the risk and impact of getting it wrong will also increase the pressure to get it right and on deadline.