Implementation Strategies for SFTR
Maryse Gordon – Finadium Webinar Review – November 14th, 2018
Earlier this month we held a webinar with Finadium and Murex to discuss the different implementation strategies available to the industry with regards to the new Securities Financing Transaction Reporting (SFTR) regime in the E.U. With Murex looking at the implementation project from an internal data management perspective, and UnaVista providing the view of an SFTR Trade Repository, we covered the planning strategies, considerations, and development options firms have available to assist in meeting this reporting obligation.
As it stands, the industry is still awaiting the final confirmation of the Regulatory Technical Standards (RTS) from the E.U. Commission and it is anticipated that RTS approval will happen in Q1 2019. From then, its details will be published in the official journal of the E.U. in Q1 2019, and then the 12 month countdown to go-live begins. Firms caught in the first phase of reporting can expect to be submitting data to an SFTR Trade Repository from Q2 2020. We have seen the schedule move a few times and with other politically charged mandates in the pipeline, namely BREXIT, this could see some impact on the timelines for reporting firms. But as with all things BREXIT, we are in a ‘wait and see’ mode.
As we wait, there are plenty of things firms can be doing, fully utilising this time to prepare for the new regime. Education opportunities present themselves with a series of webinars, conferences and papers being shared on the details of SFTR. Numerous working groups are being established to discuss the details of the regulation, and the potential pain points firms will need to address as part of their implementation project. It is not uncommon to see a delay in a regulation impact the proactivity of reporting firms, as it is never quite clear the full set of requirements that will be imposed upon the industry. However, there are huge benefits in beginning the project planning as early as possible to avoid any risk to the integrity and success of the project. We have seen that the implications of a late start to regulatory preparation can lead to lower levels of understanding regarding the requirements, less time for UAT testing, and the potential to miss the go-live, or have low quality data being reported to the end repository or regulator. An example of this can be found with MiFIR (Markets in Financial Instruments Regulation) where the industry saw a year’s delay to the go-live of the regulation. Despite this, many firms found themselves missing the go-live date, and 9 months on many firms are replaying reports that have been identified as invalid by the regulator, exposing the firm to risk of regulatory investigation.
In July 2018, we asked around 50 firms what their current state of preparation was for SFTR reporting. Nearly half of the surveyed participants were evaluating the process and technology they would use to support SFTR, whereas just under a third indicated they had not started the process or were awaiting the approval of the RTS. In November 2018, thankfully these figures had shifted with 74% of firms now making significant progress or currently evaluating the process and technology. 26% of firms still have not started the process yet, which is a cause for concern.
So there is a mix between where firms are today, some have begun data sourcing and know the gaps they need to address, some are narrowing down on specific questions related to their business, some have budgets and systems confirmed, but a good amount are still doing the high level analysis, which is quite late given the amount of time this has been a topic in the reporting world.
So what tools are out there to help firms get ready for SFTR? We already discussed the education efforts in the industry, and it is important to reiterate the importance of education as this is often cited as a reason for firms being investigated and fined by regulators, a lack of documentation and understanding of the reporting obligation. But alongside education, there are additional products and services available to reporting firms that will aid them on their SFTR journey.
Understanding is Issues
With all new regulation, there comes a set of challenges for a firm. Some they may have encountered on another regulatory reporting project, some are unique to the new regulation, but understanding where you can combat issues and planning ahead will remove any potential delays and distractions to the project.
SFTR will capture a new segment of the market, and although it is rare, some may have not been exposed to this level of regulatory reporting in the past. There will be a steep learning curve for these firms, and there may be the need to integrate new systems to the workflow process or adopt new procedures for managing the submission of data to the SFTR Trade Repositories (TR). The SFTR space is very manual in nature and firms will need to look at how RegTech can help automate as much of the workflow as possible, something that can be analysed before the final RTS has been published.
As a dual-sided reporting initiative, SFTR will see similar issues to what we saw with EMIR (European Markets Infrastructure Regulation) in that UTI generation, distribution and timeliness of reporting will be a challenge. Who will generate the UTI? How will the UTI be shared? What happens when the UTI is not available before the reporting deadline? How are records with incorrect UTIs modified? The implication of this process not being failsafe is that firms will struggle with the pairing and matching requirements, which ultimately impacts the visibility and analysis of this information for regulatory authorities. ESMA has provided some guidance on this, but guidance is unfortunately never mandated. There are vendors out there offering UTI generation and pre-matching services to help alleviate this issue, and there is no doubt that a big enough community using these services will help streamline the process a lot more efficiently, but there is an effort on the vendors offering this to get everyone who needs to manage UTI’s onboard with their UTI management system.
Where is the data?
Analysis on the requirements for SFTR has indicated that 40% of the fields required for reporting is not being captured or is not available to reporting firms. Understanding what is reportable for each product or message type, and sourcing the information is going to be one of the biggest challenges for firms, and this leads onto a discussion regarding data preparation. There is enough information in the industry today on SFTR to enable firms to begin their data preparation exercise, and there are tools and services that will enable firms to bridge the gap between what data they have today, and what data they need tomorrow to satisfy the reporting mandate.
One such tool is the SFTR Accelerator, a tool designed to help firms assess the quality and completeness of their reporting data in line with the regulatory requirements. The tool allows firms to import available data sets and validates the information against rules built in line with the reporting requirements’ specification. A report is provided back to the firm showing where the percentage of data that fully complies with the regulation and where the gaps are. Tools like this iteratively follow the guidance issued from regulators, and update validation rules in accordance to the changes, giving firms the ability to re-test their data each time new information is provided to the market, and increase the level of ‘readiness’ of their data. Firms are at an advantage using these types of solutions as they can prepare ahead of any final technical specifications, understand the systems that need to be integrated into the reporting process, and the types of validations that will be applied to the data. Doing this work upfront means that the process of onboarding with a reporting vendor is more focused on learning the functionality for the reporting application rather than the sourcing and integration of data.
Another advantage of early stage data analysis is that firms can assess the need to utilise alternative workflows for reporting. Firms can use the infrastructure and resources of 3rd parties to facilitate SFTR reporting. Although self-reporting and having complete control over the submission process is the route that will give firms full ownership and visibility over their reporting, as regulatory reporting becomes more complicated, firms are battling with this decision and look to alternative workflow models to assist. From using a Rules Engine type software for the normalisation, validation, enrichment and transformation of data to meet the reporting speciation, to using a Technical Router (e.g. OMS provider), who has the bulk of a firm’s data, for submitting the in-scope transactions to the SFTR Trade Repository. Hybrid models also exists such as Assisted Reporting whereby partial submission of data sets are provided to a Rules Engine by various parties, and the Rules Engine is used to combine the data into a single record for reporting. These options reduce the implementation time, reduce the maintenance requirements and allow firms to benefit from expert knowledge in the technology or regulatory space via external vendors. However, in choosing any of these options, it is fundamental for firms to ensure that the reporting firm has visibility of the reports submitted, as the responsibility will always remain with the reporting entity to ensure accuracy and completeness of the reports. In any of these models, the ability to provide management information, or read only access to the clients is a key requirement in on-boarding that should not be overlooked.
How can RegTech make this better?
RegTech has come a long way over the years, really helping firms efficiently manage the multitude of regulatory reporting obligations they must abide by. The first and most important element of getting this right stems from data management, and technology is key in helping progress this agenda. Generating Regulatory Hubs which act as a repository and golden source of information for reporting is a goal of many organisations, as this centralised single source of data helps ensure consistency, greater visibility of the reporting process and allows for operational efficiencies around repeatable data management workflows. Better data opens the door for better business and client analysis. Naturally, the ability to create a regulatory data hub provides opportunity for firms to utilise big data analytics, and this level of insight provides added value in aiding and influencing strategic business decisions for the organisation. Turning this non-revenue generating exercise into something that can alter the direction of the firm for growth, and increased performance is one way in which firms can find value for regulatory reporting and the RegTech that is supporting this process.
SFTR will be yet another complex regulation for firms to comply with, but as you can see, there is opportunity now to make this easier, more cost effective and be designed in a way that will bring value back to the business caught under this reporting regime.