With less than a year to go to the start of the SFTR reporting obligations, it is essential that companies do not get complacent regarding the state of their preparations. ESMA’s Steven Maijoor’s recent Madrid speech repeated the message that improving data availability and quality is at the forefront of ESMA’s list of objectives, and reinforces regulators’ expectations that everybody will be ready for SFT reporting on time. Will you be?
As if the financial community needed reminding, SFT reporting starts from 12th April 2020.
At a recent keynote speech to the Securities Lending Association in Madrid (1), Steven Maijoor, Chair of ESMA, forcefully reminded delegates that :
“SFTR is a multifaceted reporting regime and will require important market preparation. If you have not started yet, you should not further delay. Now is the time to get ready.”
Maijoor pulled no punches describing the importance of the SFTR, calling it, “the most far-reaching and encompassing legislation” in terms of collecting data to enable the Financial Stability Board to discharge its post-2008 mandate, and to provide central banks with a more robust foundation on which to base their monetary policy.
Indeed, in the same speech, Maijoor took the opportunity to reinforce the message that ESMA is determined to learn the lessons of data management under EMIR and the MiFIDs, implementing a formal data strategy. ESMA is pursuing a number of objectives, such as data standardisation (e.g. ISO 20022 XML and XBRL), the elimination of duplicate and overlapping reporting, and the streamlining of data submission. ESMA is working towards the development of a financial data dictionary, the growth of data exchange with other EU bodies, and the development of EU-wide supervisory methodologies for data analysis. At the same time, ESMA is also looking to improve the data management capabilities of its systems and staff, essential if its objectives are to be achieved.
The above points reinforce the view that ESMA really is getting to grips with the wider issues of data availability and data quality, and will be far more data savvy than it has been up to now with EMIR and the MiFIDs. The main implication for the financial community is likely to be a lower tolerance on the part of ESMA and NCAs for delays and errors in SFT transaction reports. Led by the UK’s FCA, EU financial regulators are imposing increasingly heavier fines for transaction reporting errors under MiFID, running into millions of Euros.
At deltaconX, we expect that the SFTR honeymoon period will be a lot shorter than for EMIR and MiFID II, and bigger fines for misreporting will start sooner. Failure to meet the SFT reporting requirements in full is no longer an option.
But back to reality – how are preparations going?
In terms of preparing for the what, the SFTR technical standards have been published for over a year. These have been supplemented by ESMA’s May 2019 announcement of a public consultation on the key elements ESMA’s Guidelines on reporting under SFTR (2). The Guidelines will complement the information already published SFTR technical standards, and ensure the consistent implementation of the new SFTR rules. ESMA has also announced that it will hold an open hearing on 15 July 2019 to provide further feedback ahead of the consultation submission deadline, with a final report due in Q4 2019 (3).
In terms of being ready for the deadline, confidence appears to be high. A recent survey of tier 1, 2, and 3 investment banks (4) found that although SFTR ranks almost as big a challenge as Brexit to the banking community, 99% of senior compliance staff believed their institution would be ready on time.
All good so far, but the devil remains in the detail.
The survey went on to find that virtually all the banks will be relying on adaptations to existing systems and processes implemented to address EMIR and the MiFIDs, which despite the banks’ confidence does not auger well given the rising level of fines for misreporting. Although over 70% of respondents recognise that SFT reporting will be more complex and costly than EMIR and MiFID II reporting, less than half have made any cost-benefit calculations of the regulations, or have set up any planning committee. Fewer still have made arrangements to centralise their SFT reporting, or even appoint a Trade Repository.
At deltaconX, we have to join the chorus warning against complacency, and argue strongly for the need for a centralised SFT reporting data management system. There are a number of factors to consider :
- No delay – while the implementation of MiFID II was delayed by one year giving everyone essential breathing space, the SFTR legislation has already been published in the European Journal (OJEU), meaning it will start in April 2020.
- Given ESMA’s data management strategy, the grace period for reporting errors is most likely to be shorter than EMIR’s and the MiFIDs, with NCAs imposing the first sanctions by end of 2020.
- SFT reporting
is a lot more complex than EMIR and the MiFIDs despite the obvious similarities
- SFTR encompasses a more diverse range of bespoke products that are difficult to capture and process under straight-through processing;
- SFT includes more fields (155) from more categories (4), including many data items never reported before;
- Higher data volumes and complexity are anticipated;
- Reporting of all lifecycle events affecting open positions is required;
- The need for LEI generation is more widespread;
- A UTI required for every trade
- Delaying or inadequately planning preparations could result in a lot of ‘last-minute’ wastage of resources in the scramble to be ready.
Handling this through diverse, poorly or unintegrated systems is never going to be efficient given the data volumes and complexity faced by the industry.
That said, despite the costs averaging £40m per tier 1 bank, the financial community should see some real benefits arising from their SFTR implementation, namely greater automation and control over what to now has been a very manual and bespoke process, improved transparency over funding, and better allocation and risk management of collateral. Furthermore, once reporting is centralised and automated, it can be easily scaled which supports future growth of SFT operations without inordinate costs.
In conclusion, it’s best to heed the words of a regulator :
”Firms must have proper systems and controls to identify what transactions they have carried out, on what markets, at what price, in what quantity and with whom. If firms cannot report their transactions accurately, fundamental risks arise, including the risk that market abuse may be hidden.” (5)
This regulator was talking about the rationale for imposing a heavy fine for MiFID misreporting, but the same sentiment will be applied to SFTR.
Readers should consider themselves warned, and if possible should fully participate in ESMA’s public consultation.
- Steven Maijoor ESMA Chair – “Data and reporting”. Speech to the ISLA Annual Securities Finances and Collateral Management Conference – Hotel Puerta America Madrid. 19 June 2019 ESMA74-362-39
- The study was carried out by Censuswide on behalf of Luxoft, with 331 senior compliance professionals responsible for implementing SFTR at their respective investment banks. https://www.luxoft.com/pr/investment-banks-overconfident-on-sftr-compliance-says-new-research-report-from-luxoft/
- Mark Steward, UK FCA Executive Director of Enforcement and Market Oversight
For more information on how deltaconX can advise you on the data management issues of SFT reporting, trading, and confirmation, please contact our Compliance Help Desk.