The new SFTR validation rules are around the corner: What’s changing and why?

With a week to go until updated reporting validation rules and schema come into force for the Securities Financing Transactions Reporting (SFTR) regulation, Quinn Perrot, co-CEO of TRAction gives an overview of the changes and what firms need to do to prepare.

Updated SFTR reporting validation rules and schema come into effect on 31 January 2022, leaving little time for firms captured under the regime to undertake the significant technical alignment of their existing reporting logic and code required to support the updates.

Many firms have also been caught by UnaVista’s decision to pull out of the SFTR reporting market by handing back their trade repository licence for this regime. In the UK, this leaves only DTCC as the available trade repository for the SFTR regime.

On 29 July 2021, ESMA [the European Securities and Markets Authority] announced revised SFTR validation rules and ISO 20022 XML schema as part of their aim to improve SFTR data quality and reflect the industry feedback received since the regime’s commencement 18 months ago.

The changes aim to enhance consistency with other trade reporting regimes, particularly EMIR [European Market Infrastructure Regulation], and provide further clarification surrounding certain data fields.

The impetus behind these updates is largely attributed to the lack of value and usability of SFTR trade reporting data as evidenced in a report published by ESMA early last year.

In September 2021, the International Capital Market Association (ICMA) also published an analysis report on SFTR public data on repo which identifies a list of issues. These included – but were not limited to – repo collateral data shows massive fluctuation between gross under- and over-collateralisation; and the aggregated public data appears to double-count loans where both counterparties have reported under the same regime.

In ESMA’s attempt to improve the data quality, the new rules will require the reporting of more granular data across certain action types, and loan and collateral data fields. For example: UTIs are mandatory for margin loan collateral updates; the LEI of the issuer of the security for security lending must pertain to a legal entity and not a branch; and negative values are now allowed for collateral market value.

It is highly recommended that firms self-reporting their transactions account for the time and resources necessary to carry out sufficient testing in their trade repository’s designated User Acceptance Testing (UAT) environment to avoid issues when going live on 31 January. With that being said, firms delegating their SFTR reporting to a third-party should have some assistance with the technical changes required from their third-party provider.

The results of the implementation of these changes will need to be analysed and may serve as the foundation for further improvements in future releases by ESMA. Given the challenging context of changing regulatory regimes, whether any meaningful clarification or consistency of the rules with other regimes will be drawn is yet to be determined.