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SF TR Reporting 


SFTR: forget the noise - its about reporting 


A view of the forthcoming regulation by Dean Bruyns of Broadridge 





First and foremost, the Securities Financing Transactions 
Regulation (SFTR) is a reporting obligation. The consequences 
for non-reporting are very real and should be ignored at your 
peril. Significant fines imposed under the second Markets in 
Financial Instruments Directive (MiFID II) and more recently with 
the European Markets Infrastructure Regulation, have brought this 
into razor-sharp focus. Be very sure that your SFTR reporting team 
has the experience and tools to deliver. 


Now this is not about scaremongering. It’s about considering 
individual responsibilities, leveraging opportunities and adopting 
a sensible approach to balancing the books while achieving 
regulatory compliance. 


The International Securities Lending Association, the International 
Capital Markets Association and other industry bodies are taking 
the lead by establishing working groups to deal with SFTR. 
Within this context, market players have assumed their collective 
responsibilities and contributed admirably in supporting these 
initiatives and helping flesh out the issues. 


One of the strengths of the securities finance industry is the 
collegiate-style sense of camaraderie and the market has certainly 
rallied together to get to grips with the new regulation. The danger 
however lies when the will of the most vocal prevails and some 
players get side-tracked by factors which are actually unrelated to 
compliance with the regulation. 


Focus on the fundamentals 


The concept of business as usual when new regulations intrude 
can provide a real challenge. The default settings tend to lie at both 
ends of the spectrum depending on the nature of the personnel 
within the business. 


Some parties adopt a “wait and see” approach. Others may 
even take on more than their mandated responsibility and 
end up duplicating other participants’ obligations at their 
own expense, only to find themselves over-committed and 
under-resourced. 


The ongoing costs of meeting regulatory compliance are 
not insignificant and the balance between your mandated 
responsibilities within SFTR and establishing what is surplus to 
your requirements must be carefully considered. 


Reap the associated benefits 
There are, however, benefits which can be leveraged from a 
regulatory project and these must be realised to partially offset the 


costs of SFTR to businesses. 


An example is concisely summarised in ‘The Cost Benefit Analysis’ 
conducted by Economics Europe, annexed to the European and 


SFTR Reporting 





Securities Markets Authority's final regulatory technical standards 
on the trade repositories’s (TR) mandatory obligations. 


One such TR obligation, which provides a powerful benefit to 
counterparties, is in respect of their mandated reconciliation feedback: 


“TRs should provide to the reporting counterparties (or other 
authorised counterparties) feedback messages as to whether 
the securities financing transactions is reconciled or not. If it is 
not reconciled, then TRs should detail the relevant data elements 
where reconciliation breaks take place and provide both parties’ 
values reported.” 


This clearly represents an enormous benefit for counterparties. 
The TR essentially does the heavy lifting and reconciles loan 
and collateral data, comparing submissions in the first instance, 
pointing out discrepancies, providing both values and allowing 
counterparties the opportunity to reconcile the exceptions and then 
re-submit their reports. 


Reconciling exceptions rather than the entire dataset provides 
obvious benefits from an operational resource perspective and 
essentially gets you a strong return on investment with respect to 
your unavoidable TR fees. Leverage this. 


Oversight and data lineage 


The UK’s Financial Conduct Authority recently highlighted the 
importance of oversight in its assessment of a regulatory reporting 
fine for another jurisdiction, flagging the lack of it, as a contributing 
factor to the severity of the fine. 


This validates the emphasis that the regulator is placing on 
operational and compliance oversight in relation to reporting, so 
counterparties must take note if they want to stay on the right side 
of the regulator. Mitigating fragmentation risk by consolidating 
reporting into a single, centralised hub, will go a long way in 
simplifying oversight for more secure control. 


In addition, the ability to reconcile reports from the TR back to 
source, justifying the reporting or non-reporting of trades, the 
reasons therefore and any amendments thereto throughout the 
lifecycle must be understood and evidenced to the regulators if 
called upon. 


Operational visibility within a dashboard or graphical user interface 
should be easy to interpret and include powerful data lineage 
functionality, in order to be considered fully fit for purpose. 
Counterparties should consider this as a priority if building in- 
house, or demand it from their specialist reporting supplier. 


Bear in mind, the ultimate responsibility for reporting lies with 


the counterparties involved in the trade. Understanding your data 
lineage internally holds the key to controlling this. 


www.securitieslendingtimes.com 23 





SFTR Reporting 





Data control 


The Economist: “The world’s most valuable resource is no longer 
oil, but data.” 


There are several variations of that headline so it’s clearly big 
news and with new regulations like the General Data Protection 
Regulation (GDPR) coming into play, all counterparties are well- 
advised to consider how they treat their data confidentiality. 


Data sharing is obviously unavoidable when it comes to reporting 
but this access is strictly controlled at the TR. Beyond your 
mandatory obligations you should carefully consider whom you 
share your data with and also how you realise the benefits from 
your new SFTR data resource. 


Clearly data control is retained when reporting in-house or via an 
installed on-premise reporting solution. Similarly, CSDs provide a 
trusted and natural data depository. Before relinquishing control 
to any hosted solution provider, ensure that you have complete 
confidence that your data will be properly respected and controlled 
within its environments. In short, data control must always be given 
thorough due diligence in the SFTR decision making process. 


Business edge - reporting certainty 


Responsible reporting businesses will be the winners post-SFTR 
go-live. There will be little patience extended to counterparties 
who are inefficient and slow to cooperate with timely 
reporting requirements. 


Successful implementation demands a team performance from all 
market participants and any weak links will soon be relegated to the 
bench and leak market share. There will no doubt be challenges that 
will take time to iron out. However, beyond any initial grace period, 
should there be one, players will have to step up and perform. 

Performance requires prudent decision making. Choosing 
your reporting team wisely. Are they experts in their field? Is 
your in-house knowledge base sufficient? Have you given due 


Responsible reporting businesses will be 
the winners post-SFTR go-live p 5 


Securities Lending Times 





consideration to improving agency lending disclosure and bilateral 
legal negotiations if you decide to trigger step one? 


Beyond go-live, performance requires booking trades quickly and 
accurately, sharing trade details efficiently, submitting reports on 
time, acting on TR rejections promptly and reconciling feedback 
for resubmission. 


Everybody has their function, which must be fulfilled for 
the regulation to work. CCPs, trading venues, matching and 
confirmation platforms alike must follow their regulatory 
mandates in respect of factors like unique trade identifier 
code generation and the timely sharing thereof. Firms ignoring 
this should expect a robust response from the regulators and 
risk reputational damage from within the securities finance 
community. So report responsibly, fulfil your function, avoid 
duplication and gain an edge. 


Commercial flexibility, agility and independence 
Albert Einstein: “The measure of intelligence is the ability to change.” 


Retaining agility in the face of future SFTR revisions and the 
addition of new jurisdictions is a massive consideration. The ability 
to change, whether out of necessity or to embrace opportunity, is a 
major factor for market players to consider. 


Change becomes easier when solutions are abstraction layers 
within the businesses infrastructure, allowing for seamless 
integration and business continuity with minimal disruption 
and flexibility when it’s time to adapt. Reaching that status and 
embracing change requires bold decision making, stepping out of a 
comfort zone and opting for quality over familiarity. 


Choosing best-of-breed solutions for their unique specialities is key 
to building a strong team around the core business, in whatever 
capacity they contribute. It also allows for easy extrication if the 
relationship sours, or if new and improved opportunities arise. 
Retaining that agility and independence keeps the power base 
where it belongs. SLT 





Dean Bruyns 
Broadridge 





www.securitieslendingtimes.com