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January 29, 2018

It Ain’t Over Till The Fat Lady Sings (Part 2) The Securities Financing Transactions Regulation (SFTR)

SFTR was published in the Official Journal back in 2015 and we’ve already gone live with the Article 15 ‘transparency of reuse’ requirements in 2016, as well as the Article 13 and 14 ‘transparency requirements’ for collective investment undertakings in 2017.

SFTR was published in the Official Journal back in 2015 and we’ve already gone live with the Article 15 ‘transparency of reuse’ requirements in 2016, as well as the Article 13 and 14 ‘transparency requirements’ for collective investment undertakings in 2017. Throw in a bunch of stuff about trade repository registration and recognition for their third country equivalents and that pretty much covers it.

Other than, of course, the Article 4 ‘reporting obligation’, which is nothing short of a technical monster.

I don’t often make a big deal about reg change specifics – all reg change is complex and you just get on with the challenges that it presents you but this is definitely one of those to bring to your attention. The last time I hit the alarm button was back in 2014 when I highlighted the fact that the ‘MiFID Review’, as it was then called, would be nothing short of mind boggling. My rationale at the time was simple and I wrote the following about MiFID 2:

“I say mind boggling from a multi-dimensional perspective. The first dimension being its complexity, the second dimension being its scope and the third dimension being the sheer volume of the legislation itself.”

Given that I called this out four years ago, I’ll leave you to decide whether you think I was right or not , and so why am I making such a big deal now about the SFTR reporting obligation?

I guess the first point is that security financing transactions are complex instruments that not that many reporting folks will have much, if any, experience with – think OTC derivatives, but in a foreign language you can’t speak. And so your business analysts are going to have get jiggy with understanding the difference between a repurchase agreement, a buy-sell back agreement and a securities lending transaction, whilst jumping head first into understanding how margin lending works in your prime brokerage unit.

If reporting a ‘new instrument’ per see wasn’t bad enough, we also centrally clear some of these things and so take your securities financing transaction reporting regime and slap everything you know about EMIR trade reporting for centrally cleared derivatives on top of it – life cycle events and all! But the icing on the cake for me is the collateral reporting and the reuse reporting and there’s about 30 pages covering this in the Final Report that will leave you mesmerised. The first time I walked through this with my colleagues in the project team I barely understood some of the scenarios that ESMA has painted, which demonstrates the complexities behind these instruments.

For those of you that need this in numbers, the draft technical standards in the Final Report are currently looking at 153 reportable fields – yup, 153! – across counterparty data, loan and collateral data, margin data and re-use data, whilst the reporting obligation also introduces a new category of EMIR counterparty – the ‘NFC small’, whose SFTR reporting will be delegated to its FC counterparty as a single-sided report. Throw in EMIR-style transaction and position level reporting, dual-sided delegated reporting, a four date phase in once the technical standards are published, followed by another four date phase in for the backloading of historic reports – remember the problems these caused with EMIR?! – and you are probably starting to get the gist of how complex SFTR reporting is going to be.

From a regulatory perspective, we are still waiting for the final versions of the RTS and ITS to be published in the Official Journal, upon which the clock will then start ticking for a 12 month countdown for investment firms and credit institutions to start reporting their SFTs. From what I hear, it looks like the regulators are being kind to the industry in not landing this one right on top of MiFID 2 but for something this complex, when the technical standards land, 12 months is not a lot of time to complete this.


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