As SFTR Deadline Looms, Time to Take Control of Your Data
Looming regulatory deadlines – such as the impending roll-out of Europe’s Securities Financing Transactions Regulation (SFTR) – are rarely welcomed by compliance teams at buy- and sell-side firms. But the introduction of this complex and far-reaching regulation, starting April 2020, offers market participants a significant opportunity. Firms that have so far adopted a tactical approach to European reporting requirements can leverage SFTR to switch to a more strategic mindset.
Compliance teams know that quick fixes – third-party delegation or other regulation-specific “point solutions” – do not address the fundamental mismatch between the data generated by internal systems and that required by regulators. Those that use SFTR to take greater control of their data stand to achieve substantial long-term process improvements and cost-efficiencies.
What have we learned from the release of EMIR (2014) and MIFID II (2018), which respectively introduced standardized reporting requirements in Europe for derivatives and then a wider range of instruments across Europe’s financial markets and beyond?
First, pre-existing systems used for order generation, transaction execution and collateral management are not easy to adapt to new reporting requirements, with market participants left needing to enrich, aggregate and validate data efficiently and accurately across a diverse range of instrument types. Under deadline pressure, this problem has often been tackled by delegating reporting to a third party or buying (or even building) a regulation-specific solution. For delegators, a key risk is a loss of control, despite still being liable for reporting submitted on their behalf.
Delegated reporting services from dealers have proved to be variable in quality, while delegating firms struggle to develop the subject matter expertise to improve data and process quality over time. Continued delivery of poor quality data to outsourcing suppliers, due to inadequate feedback loops, inevitably incurs cost and risks fines. This issue is particularly acute if – as with EMIR and SFTR – double-sided reporting requires transactions need to be matched at the trade repository level.
For those buying ‘point solutions’, the downside is the lack of future-proofing, while building in-house can be highly resource-intensive. What happens when regulatory requirements evolve, as with both EMIR and MiFID II? What happens when international agreement is reached among regulators on use of a new identifier that must be incorporated into reports? Bought-in point solutions rarely offer the change management capabilities to handle these inevitably developments and it can be expensive to maintain the required resources and processes in-house.
Indeed, many firms have found themselves devoting valuable human and financial resources to handling multiple incremental changes to regulatory requirements. Due to inadequate change management, market participants have been building new features and maintaining inefficient processes, diverting attention away from activities that increase revenue and/or value to the end-client.
This is the second key lesson: regulation is an imperfect and evolving process, requiring regulated firms – and their compliance teams in particular – to oversee adjustments to their internal workflows and systems on a regular basis. This is likely to be our experience of compliance with SFTR, too. For now, European Securities and Markets Authority (ESMA) recognises that SFTR’s requirement for reports to include legal entity identifiers for collateral issuers cannot be met fully because these are not yet widely adopted in Asia and the US. But this will change over time and must be anticipated for smooth ongoing compliance. As ESMA Chair Steven Maijoor recently noted in his address to the FESE convention, the interplay between global capital markets and regional/national regulation “implies a continuous challenge” for supervisors and market participants alike.
Change of mindset
In view of the ongoing operational challenges presented by evolving regulatory reporting requirements, we believe there is merit in a change of mindset. Rather than a necessary evil, reporting obligations can be regarded as a launchpad for a more sustainable approach to data management that yields extensive improvements across the daily operations of market participants.
For any firm that has used tactical reporting solutions to date, compliance with SFTR is likely to be a painful, complex and costly experience. SFTR reporting includes a larger number of data fields, many focused on re-use of collateral, posing severe problems for firms using fragmented architecture and semi-manual processes across collateral management, repo trading and securities financing. And despite slow progress on standardization of unique transaction identifiers, ESMA is insisting on accurate data and high match rates from the outset.
Clearly, time is of the essence. But greater control of data and more streamlined reporting processes have benefits beyond compliance. The back offices of market participants have long been plagued by trade fails, breaks and costly manual intervention due to imperfect information flows and missing or incorrect data fields. A more comprehensive approach to data management and governance not only reduces these risks and costs, but offers the possibility of new insights and efficiencies. For example, firms may be able to identify and eradicate common sources of mismatches, perhaps pertaining to particular counterparties.
Tactical solutions for EMIR and MiFID II have typically offered users neither short-term fixes nor long-term benefits. For market participants willing to adopt a positive mindset to regulatory reporting, SFTR offers an opportunity to take control of data and to build a strategic platform that will deliver both low-effort compliance and high-impact benefits year on year. To find out more about how CSS can help you take control of your data, please visit our TradeChannel page or contact us.