Securities lending traders may be forced to leave the market following SFTR

Experts say some firms could leave the market temporarily or permanently due to incoming securities finance regulations.

By Joe Parsons

Banks and other agent lenders are concerned firms may be forced out of the securities lending market after new rules requiring traders to report their transactions are enforced.

The incoming Securities Finance Transaction Regulation (SFTR) in Europe requires firms to report a total of 153 fields on a T+1 basis for their securities lending and repo trades.

However, banks are worried the resources needed to update operations and ensure compliance will drive out asset managers and beneficial owners from the market.

“We could see liquidity in the market being impacted by SFTR, as some firms may be unwilling to build reporting mechanisms and therefore could leave the market either temporarily or permanently,” said one agent lending bank at a conference in New York.

“You need the resources to be complaint, and firms may need to take that from other areas of the firm and implement new technology in order to comply.”

Another head of securities finance, speaking under Chatham House rules, explained the technology and vendor costs on the agent lender will also make them less profitable, and the rules could take liquidity out of the market.

Market infrastructures, funds and non-financial institutions will be subject to the SFTR rules at three month intervals, respectively, starting from the second quarter of 2020.  following the initial date of implementation.

The rules enforce that all securities financing transactions to be reported to a trade repository.

There are also concerns about that over reporting and inaccurate data could lead to the same fines the market has since with MiFID and EMIR, while another agent lender speaker explained it is still not clear what the trade repositories and regulators will do with the data.