The interview below with Philip Flood, Business Development Director - Regulatory and STP Services, Gresham Technologies (Gresham), originally featured on FTF News on Thursday September 16th, 2021.
To quote the European Securities and Markets Authority (ESMA), the Securities Financing Transactions Regulation (SFTR) “responds to the need to enhance the transparency of securities financing markets and thus of the financial system."
The Regulation was published in the Official Journal of the European Union on 23 December 2015. For firms that do business in Europe, the SFTR regime covers repurchase transactions, securities and commodities lending, securities and commodities borrowing, buy-sell back transactions, sell-buy back transactions, and margin-lending transactions.
FTF News got time with Philip Flood, Business Development Director, Regulatory and STP Services, Gresham Technologies, to focus on SFTR reporting concerns that are hitting home for many firms.
Q: What is the single, largest obstacle to optimal SFTR reporting?
A: Data quality is the biggest challenge and the hottest topic for any regulatory reporting solution right now, and this is magnified under SFTR because of its complex, high-volume data requirements. SFTR has similarities with EMIR [European Market Infrastructure Regulation] reporting and in the rush to comply, many firms have chosen to leverage an existing solution to reduce the cost and resource burden.
However, in ESMA’s recent data quality report released in April 2021, the regulator highlighted the need for “increased efforts” on data quality for EMIR and SFTR. Attempting to re-use existing solutions already prone to data quality issues compounds the problem further. ESMA’s findings show that transactions are failing to be reported on time, contain incorrect message formats and data rules, and that there is often poor or no reconciliation or reporting at all.
SFTR has over 150 reportable data fields, with financial institutions needing to report across the entire trade life cycle. This includes margin and collateral data elements that aren’t typically included in a single post-trade data feed, creating the need for firms to ingest data from their other systems to build a complete submission, daily.
Q: How are buy side and sell side firms planning for the next phases of their SFTR reporting responsibilities? What strategies are they considering?
A: The new validation rules and XML schema changes will be introduced from 31st January 2022, just over a year after the final phase went live for non-financial counterparties in the E.U. (notably the U.K. did not implement this phase).
As always, time is short and the rush to comply may overshadow any strategies at this point. Many market participants will also be migrating from Unavista to possibly DTCC or Regis-TR after Unavista indicated they would be closing the SFTR trade repository.
Further changes are expected in April 2022 with regards to rejections and reconciliations, and firms that will handle these updates and changes will ultimately be those that have technology solutions that can adapt.
Q: How viable is the strategy to consolidate SFTR reporting and other regulatory requirements via a single platform?
A: A trend we have seen is the need to consolidate reporting processes into a single platform, and recent implementations for SFTR have helped trigger firms to rethink their approach, driven by operational cost and efficiency.
And it is viable. Reporting data sets are similar and there is overlap with other regulations – EMIR having similar dual-sided reporting and reconciliation requirements just like SFTR. It makes sense to centralize and consolidate data and reporting rules, and the technology exists to do this at scale, while retaining control.
Regulatory technology has matured, and cloud-based solutions offer a cost-effective alternative. Reconciliation and exception management processes can be unified across regimes and make use of the same reference data or security master sources needed to both enrich and reconcile activity.
The problem is legacy technology that is used for existing reporting is being leveraged to create in-house single platforms. These were never designed to adapt as firms couldn’t have foreseen the rate of regulatory change we have witnessed.
EMIR has been live for eight years, yet matching rates are low and there are still challenges with unique trade identifiers (UTIs), something the market has continually struggled with for years now.
Q: What are some key factors that firms should consider when they are grappling with the decision to either outsource their SFTR reporting or enhance their internal IT infrastructures?
A: The key task is to review the existing reporting solutions as a whole. Will they invest in being strategic with their reporting processes horizontally across the firms or will new implementations like SFTR be another standalone point-to-point solution that addresses a vertical?
The pandemic has been a catalyst for reviewing regulatory reporting solutions, with firms looking toward outsourced cloud-based solutions that can control spiraling costs and address multiple regimes. Especially for mandatory reporting that offers no competitive or strategic advantage, technology innovation by specialist vendors has outpaced that of internal IT infrastructure.
There are a number of reasons as to why specialist vendors are playing a greater role in regulatory reporting: the cost of compliance, not only in development and remediation but ongoing operational costs and potential changes; the technology required to deal with the width and volume of data sets key to scaling and adapting to market changes; and the fact that internal resources are often prioritized toward front-office innovation.
Q: As SFTR reporting advances, do officials at Gresham Technologies anticipate that they will be developing partnerships with other industry participants?
A: Yes, best practice reporting requires collaboration between market participants, vendors, reporting endpoints, and industry associations to improve reporting quality and reduce the ambiguity that exists with reporting rules, fields, definitions, and standards. Partnering provides clients with the best possible solutions and options for when inevitably either regulations change or the reporting landscape changes.
Recently, Unavista announced the closure of their SFTR Trade Repository which leaves firms needing to migrate to a new TR and adapt their relatively new implementations to a new reporting workflow. For those with in-house solutions, just when you think the cost and resources required on the remediation work post-go-live are fading, there is now another IT project and a whole new period of regression testing.
By Gresham partnering with different TRs, it gives our clients choice and portability, shielding them from reporting landscape changes.
Q: What are some emerging technologies that might prove useful for firms and their SFTR reporting requirements?
A: Artificial intelligence and machine learning have started to make the jump to regtech and combined with big data technologies and the streaming of high-volume data using Kafka [Apache Kafka is an open-source, distributed event streaming platform], these are well suited for regulatory reporting cloud-based solutions.
As an innovator, we invest in these technologies because they will be the future of reporting solutions. They allow better decision making and improved automation to perform repetitive tasks around exception management and reconciliation.
The work the Bank of England has done around machine readable regulatory text, ISDA [International Swaps and Derivatives Association] with the Common Domain Model (CDM), and adoption of ISO2022 will go some way into standardizing regulatory reporting.
To hear more from Philip and Gresham's team of data integrity experts, as well as major financial institutions, on regulatory and data challenges, download our white paper, "Data integrity: Your key to confidence in a complex regulatory environment". Or, learn more about our securities reconciliation solution.
