From Compliance Matters:
Yann Bloch, NeoXam, Product expert, Boston, 20 February 2020
With the dust from the European Union’s second Markets in Financial Instruments Directive finally starting to settle, the attention of financial firms is understandably turning towards the next four-letter regulatory acronym. This is the Securities Financing Transactions Regulation.
A traditionally under-reported part of the market, the complex world of repos and securities lending is going to come under the compliance officer’s spotlight.
There are always initial concerns with any new rule, but preparations for the advent of the SFTR should definitely be less frenzied than the preparations for its predecessors. This, in large part, is due to the similarities it shares with existing regulations. Many financial institutions have already found that systems and software developed for MiFID II can be adapted for compliance with the SFTR.
Take the distinct lack of clarity currently surrounding the way in which intraday cleared transactions will be reported. As things stand, they may vary by the nature of the instrument being traded. There are also worries about how to identify an SFTR trade. Certain venues may be required to generate Unique Trade Identification (UTI) codes, while trading firms are going to have to maintain tracking codes as part of their reporting. These problems are not a million miles away from some of the early teething troubles that firms faced in respect of MiFID II’s transaction reporting regime.
However, transaction reporting is by no means the only area in which firms have to prepare for the SFTR. ‘Best execution,’ the legal imperative to seek the best execution reasonably available for one’s customers’ orders which was at the heart of MiFID II, places a huge amount of emphasis on the quality of data. The SFTR is no different. Because of the rules, market participants will only be able to undertake various pressing tasks with clean and consistent data. For example, hedge funds will have to delegate their reporting to third parties. This involves the documenting of total interest in a given stock to each prime broker. Without good data, they could report inaccurate information.
To ensure full compliance, firms need to know intricate details of the kind that MiFID II demands. These details pertain to their ability or inability to amend whatever is being reported in their names and their ability or inability to measure what has been reported and to show various parties that they have done so. With such a vast amount of activity to record, from daily margin-lending transactions to numerous collateral updates and valuations, it is essential that firms have their data in order before phase one begins in April.
The SFTR is unquestionably an important missing piece in this complex regulatory jigsaw that market participants have been assembling over the past decade. Since the markets crashed in 2008, the industry has been looking for ways to remedy its long-standing reporting-related shortcomings in this specific part of the securities lending and repo markets. With MiFID II setting a precedent for dramatic technological change, financial institutions that use the work they have already done to satisfy that directive as a foundation for their compliance with the SFTR are likely to be better prepared than others for the changes to come later this year.
* Yann Bloch can be reached on +1 617 314 6617