Firms in Asia need to start preparing for the impacts SFTR will have on the way they manage their information flow when working with European counterparties, says DTCC’s Oliver Williams.
The Securities Financing Transactions Regulation (SFTR) is the next EU regulation set to transform the financial securities industry. Like MiFID and the European Market Infrastructure Regulation (EMIR), SFTR will bring greater transparency to securities financing and repo markets.
SFTR is a new regulatory reporting obligation on securities lending. While SFTR is a European regulation, firms across Asia could fall into scope due to the mandate’s extended remit. Once enforced, EU-based ﬁrms and their non-EU-based branches, as well as non-EU-based ﬁrms where the transaction is executed by an EU-based branch of the firm, will be obligated to report their securities financing transactions (SFT) to an authorised trade repository.
As a result, selecting a global trade repository has become an important consideration for many firms to increase efficiency, reduce complexity and ensure a smooth implementation of SFTR.
SFTR is expected to go live in early 2020, and will impact firms investing in collateralised transactions, such as repo and reverse repo transactions, as well as margin loans.
It will not only increase reporting requirements, but will also directly impact trading and collateral management activities. Associated compliance costs and increased regulatory disclosures associated with SFTR may affect the way firms source liquidity and securities for repo and lending in the market.
In particular, the new requirements related to the need for disclosure and consent around the reuse of instruments provided as collateral are expected to impact the way firms in Asia manage their information flow when working with European counterparties.
Based on the industry’s experience with EMIR, SFTR is likely to create a sizeable number of day one reconciliation issues. Therefore, reporting entities and their trade repositories will need to be prepared and develop effective plans to resolve these reconciliation breaks as quickly as possible. Many firms will turn to trade repositories with proven capabilities in this area.
Why is SFTR necessary and how does it work?
Since the financial crisis, heightened regulatory scrutiny has prompted further use of collateral, especially when trading OTC derivatives. SFTR seeks to ensure greater transparency in the SFT space, as transaction volumes continue to increase. By reporting SFTs to a central repository in a standardised way, regulators will gain new insights into potential systemic risks.
In Asia, nearly every major financial market has a requirement for reporting OTC derivatives. While no plans for SFT reporting have been formally published in Asia to date, given the sophistication of markets in the region, it is reasonable to assume that similar requirements may be considered in the future.
As with the EMIR implementation and earlier derivatives trade reporting requirements, it is likely countries across Asia will wait and assess how Europe’s experience impacts markets and market participants, and make their SFT reporting decisions based on those lessons. Based on the structure of regional markets and past regulatory actions, this could begin in Australia and Japan, followed by Singapore and Hong Kong.
Trade repositories will likely play a key role in this dialogue should it advance, ensuring that global expertise and best practice are shared across the region.
What are the barriers to successful implementation?
A significant amount of preparation is required for successful implementation around SFT reporting, and firms should not underestimate this. SFTR proposes a total of 153 fields for reporting a securities lending trade, and over 80 proposed reporting fields for repo transactions alone.
Inter- and intra-trade repository reconciliation is required on most fields on an ongoing basis, with very little tolerance for error. This is particularly challenging as the securities financing world is often bilateral, with elevated levels of manual intervention.
Overall, derivatives, even OTC derivatives included under EMIR and MiFID, tend to have higher rates of straight-through processing (STP) within their trade capture and booking flow, and have been regulated for quite some time.
With the substantial number of proposed fields and complex reconciliation requirements, implementation of SFTR will be a challenging task for many institutions. The diverse nature of securities financing instruments and the variables that can come into play also make SFTR reporting more complex than prior regulatory requirements around transaction reporting.
How can trade repositories help?
Selecting an appropriate trade repository for transaction reporting is critical to the successful implementation of SFTR. Trade repositories are well-established solutions that are already supporting regulatory reporting for the global OTC derivatives market.
In most developed Asian markets, trade repositories’ extension into SFTs will enable the market to tackle the evolving operational and regulatory challenges by leveraging proven solutions, known support teams and trusted relationships.
SFTR will have a significant impact on the financial securities industry. Firms with a presence or a counterparty in the EU will be required to comply with SFTR and should begin planning immediately, considering a multi-jurisdictional approach.
While Europe may have taken the lead on SFTR, other countries are set to follow, and the time is now for market participants to prepare.
Oliver Williams is Executive Director and Region Head of DTCC, which operates trade repository services in Japan, Singapore, Australia, the US, Canada and Europe, as well as agency services in Hong Kong.