Securities Financing Transactions Regulation (SFTR) Reporting: Raising Compliance Costs?
January 2021 saw the ‘go-live’ of the final phase of the Securities Financing Transactions Regulation (SFTR) reporting – but not for everyone. With the eleventh-hour Brexit deal excluding financial services equivalence, the UK and EU are now free to diverge on regulatory matters. The UK stated back in June that it would not be applying SFTR to non-financial counterparties, the final group in scope.
So with all SFTR reporting now in flight, what have we learned? Well firstly, it seems highly likely that this won’t be the last we see of UK/EU regulatory divergence, particularly if either side decides to play politics. Whilst UK based institutions may find themselves with reduced compliance obligations, any time or resources saved will be outweighed by the additional complexity of dealing with two different regimes.
Secondly, SFTR has shown us that the consequences of even the smallest data quality issues or errors are magnified when it comes to regulatory reporting. With SFTR reporting fields running into the hundreds and requiring two-way reporting, multiply these by the volume of reportable trading activity firms conduct on a daily basis and things could quickly get out of hand. Firms are carrying out more securities reconciliations to address potential inaccuracies which is helpful, but also places additional strain on legacy systems which just cannot cope with the volumes and speed required.
SFTR reporting was introduced with the intention of bringing transparency to the complex securities financing market, and many see increased standardisation as a potential upside, laying the groundwork for a more efficient, digital industry. This would however require significant operational work to address the aforementioned legacy issues, creating additional strain in an already difficult business environment. SFTR reporting does also need to adhere to the ISO 20022 standard, and whilst this should enable firms to report more efficiently across jurisdictions as well as make it easier for regulators to share data with each other, we have seen a number of financial institutions opting for message translation workarounds rather than committing to large scale ISO 20022 transformation projects, at least for the time being.
So does this mean that SFTR and other regulations are destined to continue increasing the cost and burden of regulatory compliance? Not necessarily. By taking a strategic approach to regulatory reporting as opposed to the piecemeal ones often seen to date, firms can apply processes they have already developed across multiple regulatory jurisdictions. This method is much less vulnerable to divergence between regimes or the emergence of new requirements. It also enables firms to take a more holistic approach towards tackling their data quality issues, cementing their ability to rely on high quality, accurate data long into the future, which in turn decreases the costs associated with ad-hoc data and reporting fixes. And whilst quick, simple, out of the box ISO 20022 solutions are an option in the short term, the industry should ask itself whether this is really the approach it wants to take given the intent to increase efficiency through digitalisation.
When you consider this reasoning, industry wide standardisation becomes much less daunting. Freed from the tyranny of everyday data and reporting corrections, organisations are able to devote time and resources to ‘change the bank’ projects requiring a more innovative and creative approach, making SFTR - and all regulatory reporting - a value adding activity, not just a cost.
To learn how financial institutions are making their SFTR reporting and other regulatory reporting projects more efficient, watch our webinar on Leveraging the Lessons of Regulatory Reporting, featuring speakers from Standard Chartered and BMO Financial Group.