Industry attention turns to SFTR as other regulations pass

For the first time, trade reporting requirements will be imposed on repos and other securities financing transactions.

By Jonathan Watkins

Market participants active in repo and securities lending markets are readying for a new set of sweeping regulations, set to be published in the second quarter of 2018. 

With vast amounts of effort poured in MiFID II at the start of the year, the Securities Financing Transaction Regulations (SFTR) will now be a priority for many firms this summer. 

The purpose of SFTR is to provide greater transparency on cross-asset class lending, borrowing, repurchase agreements and sale/buy-back agreements among counterparties in the EU.  

The regulation came into force in 2016, however the final endorsement from the European Commission is expected in the coming months. 

Following this, firms are being encouraged to start building and testing their infrastructures ahead of the rules coming into force on in 2019, a year on from the final endorsement. 

In order for firms with an SFTR requirement to meet the deadline, the first compliance phase which includes design, build and test of the infrastructures should begin in the second half of 2018. 

“With MiFID II in effect, the securities finance industry is preparing for future obligations under SFTR, which for the first time imposes trade reporting requirements on repos and other transactions,” said Ed Marhefka, managing director and global co-head of securities finance at IHS Markit, following the recent addition of new banks to its SFTR reporting solution. 
Post-trade and technology firm NEX released a report this week highlighting the challenges of the regulation, concluding that market participants need to “identify, access and work with the real data that they will need in order to comply with the new regulation.” 

Despite other reporting obligations under European Market Infrastructure Regulation (EMIR) and MiFID II coming into force, NEX added that SFTR could be the most challenging. 

In some respects, it is the most challenging, because it shines a light on a segment of the market that has historically been lightly-regulated and under-reported,” NEX said in its report.  

“In casting the regulatory spotlight on to the repo and securities lending market, and on 

to the re-use or re-hypothecation of collateral, SFTR addresses the issue of opacity in the fast-expanding shadow banking sector.” 

Within the report issues around report formatting, double-sided reporting and data management were highlighted as most important, along with the generation of unique transaction identifiers (UTI). 

The issue of data specifications and UTIs has been a focus point for industry body International Securities Lending Association (ISLA) in recent months. 

The rules will be similar to that of EMIR which included dual-sided reporting. Counterparties will have to report details of the conclusion, modification and termination of any securities finance transaction to a registered trade repository on a T+1 basis. 

“The challenges associated with the implementation of SFTR are alleviated, in some measure, by the precedent of the European Markets Infrastructure Regulation (EMIR) in the 

derivatives market, if only because it provides a blueprint of many of the pitfalls to be avoided,” added NEX in its report. “Nevertheless, the reporting requirements called for by SFTR will be formidable.”