No ‘fundamental changes’ to SFTR from the European Commission

Industry awaits formal approval from European Commission, but Global Custodian understands it will make no 'fundamental changes' to SFTR which now looks to be adopted in at the end of the year or Q1 2019.

By Jonathan Watkins
Despite some hopes to the contrary from market participants, incoming securities financing reporting rules are unlikely to undergo wholesale changes by the European Commission as it wraps up a review of the regulation, Global Custodian understands.

The Securities Financing Transaction Regulation (SFTR) was introduced in 2016, though the securities services industry has been awaiting the final endorsement from the European Commission, which many believed would come in June.

The European Commission has now told active SFTR campaign company, Market Finreg, that the vast majority of the rules will remain as they are and that adoption is likely to come either at the end of this year or Q1 2019.

Requirements will then come into force a year later for investment firms and banks, with a proposed phase-in approach seeing other market participants such as insurance companies and pension funds subject to the regulation six months after that.

“This week is the key period, if they [The European Commission] can finalise their review in the next two weeks it could be Q4 2018. If they can’t then we are looking more at the start of 2019,” Seb Malik, head of financial law at Market Finreg told Global Custodian.

“There are two things we now know. Firstly we have – to a reasonable level of precision – the timescale we are looking at. Secondly, we know there are no fundamental changes; as they put it to us the issues under dispute are ‘very narrow’.”

A number of other SFTR reporting firms confirmed that rules are likely to come into force in Q4 2019 or Q1 2020, depending on the European Commission’s adoption announcement.

According to Alexander Westphal, a director in the ICMA market practice and regulatory policy team, the ruling from the European Commission is still not the end of the process.

“The RTS [regulatory technical standards] has to be reviewed by the Parliament and the Council before they are adopted and published; only then will we have a clear idea of the timeline to implementation,” he explained to Global Custodian.

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.

Market participants active in repo and securities lending markets have not had to comply with reporting requirements before when engaging in these activities.

SFTR will contain an estimated 150 reporting fields to fill in, and there will be a need for unique transaction identifiers (UTI) along with dual-sided reporting.

The challenges the industry will face will be similar to derivatives reporting rules which came into force in 2016, however a source told Global Custodian earlier this year that “the tolerances that were there for EMIR might not be there for SFTR.”

“The implied go live date from the Commission brings much needed clarity to market participants currently embroiled in securities finance data preparations,” said Chris Dingley, director for NEX Regulatory Reporting.

“The sheer magnitude of the SFTR reporting requirement looks intimidating at first sight, particularly when delving into the depth and granularity of the data prescribed.

“One of the biggest SFTR hurdles to overcome is ensuring complete data accuracy. In order to achieve this, firms will need the capacity to track historical information right back to its original source.”

Earlier this week, Global Custodian published a feature on SFTR stating that the time to prepare for the regulation is now. You can read the full feature by clicking here.