New paper highlights the impact of incoming securities finance trade reporting obligations on the industry including collateral supply, liquidity and operations.
DTCC (the Depository Trust & Clearing Corporation) has published a new paper revealing that SFTR (the Securities Financing Transactions Regulation) may create five times as many reports as trades when the regulation takes effect in early 2020.
SFTR is part of the European Union’s approach to meeting objectives set out by the FSB (Financial Stability Board) to increase transparency in the use of securities lending and repos (repurchase transactions). The regulation will require firms to report their securities financing transactions to an authorised trade repository registered by ESMA (the European Securities and Markets Authority).
While some firms have already begun preparing for the implementation in Europe, due to the global nature of the requirements, other jurisdictions including those in Asia may implement similar mandates to meet the FSB’s objectives.
The new paper highlights that SFTR is likely to significantly impact trade booking models and affect 60 percent of current processes resulting in the need to develop new processes. Furthermore, the new regime may create changes to sources of collateral supply within the market and the industry will need to make provisions to ensure these unintended consequences do not result in collateral supply and liquidity issues.
“This paper highlights the significant impact that SFTR implementation will have on the financial industry,” said Val Wotton, Managing Director, Product Development and Strategy, Derivatives and Collateral Management at DTCC. “While SFTR will be phased in starting in 2020, market participants must act now to be ready for implementation and to avoid any issues around trade reporting volumes, liquidity and collateral supply.”
Based on the experience with EMIR (European Market Infrastructure Regulation), SFTR is expected to generate a significant number of reconciliation breaks. To ensure readiness, market participants should work to develop a strategy to manage these reconciliation breaks and ensure efficient data management processes have been adequately reviewed, the paper says.
It also recommends that firms assess the impact of higher disclosure levels required by SFTR, particularly around agent lending and prime broker businesses. Agent lender disclosures may no longer be fit for purpose while hedge funds leveraging prime brokers may be required to provide wholesale disclosure to regulators, it says.
Additionally, given that the securities financing industry has much higher levels of manual processes than other product areas, firms should ensure greater levels of automation across the trading and operations functions to manage the expected increase in volumes.
The paper is available for download here.