For those financial institutions that are involved in Securities Financing related activities, the deadline for SFTR Implementation is fast approaching. There are a number of surveys being published by various industry sources which point to either complacent approach or lack of preparation ahead of SFTR deadline of April 2020.
Finperform has been helping financial institutions (especially Tier 2 Banks) on SFTR Implementation. Based on our experience, we highlight the top 5 items to consider for Tier 2 / Tier 3 banks in their approach for SFTR implementation.
- Product Analysis
- Data Gap Analysis
- Vendor selection
- Counterparty outreach
- Operating Model
Banks need to identify the list of products that could be in the scope of SFTR. SFTR stipulates the following transactions come under the scope of SFTR
- Repurchase transactions
- Securities Lending / Securities Borrowing
- Margin Lending
- Buy Sell Back / Sell Buy Back
It is imperative that the financial institutions perform a deep dive into all of their current transactions and map their products to an existing transaction reporting obligation (such as EMIR, MiFiR). As SFTR is the last transaction reporting obligation, ideally all the products that are currently traded by a bank, should be reported under an existing regulation or under SFTR. For the products that are not reported, there has to be a clear explanation as to why they are not reported.
Data Gap Analysis
SFTR requires a financial institution report upto 153 data attributes as part of reporting obligation. Not all the attributes are applicable for all the financial institution, as some of them are specific to a particular product (for example commodities or margin lending), or for a particular type of transaction (for example modification). However it is important that a financial institution performs a gap analysis between their current data availability vs the SFTR requirements. This exercise ideally should point out the gaps in the data, which could drive further discussion on the sourcing of such data. In certain instances these data items could be sourced internally or from an external source. However there are certain cases, where the data sourcing could be challenging for the entire industry (for example LEI for issuers, or the CFI code).
One of the key decision for a Tier 2 bank is to choose the appropriate technology vendor. One of the positive aspect that SFTR brought about was collaboration between various technology partners and sometimes with the industry working groups to arrive at a solution that should meet most of the industry requirements. As ever, there is no single solution to meet the requirements for all banks. The decision to choose a vendor hinges on a number of factors such as the nature of platform (i.e. cloud vs inhouse), existing relationship, product coverage, additional functionality (such as connection to CCPs), eligibility screening, data lineage requirements etc. A Bank has to be careful in choosing the appropriate vendor which meets their requirements. Finperform can evaluate the requirements from a business perspective and provide an independent assessment as to the appropriate technology partner considering all the factors that is critical to the business.
SFTR reporting obligation is not only a typical back office / middle office reporting issue. It touches the front office and the booking model of transactions. It is imperative the front office and the client facing teams are aware of the consequences of misreporting of trades and the reconciliation breaks between financial institutions. Also, there are requirements for mandatory delegated reporting and the option for voluntary delegated reporting. These requirements and expectations have to be communicated in advance with all the counterparties so that all the parties are aware of each other’s position regarding SFTR.
The success of SFTR or any other reporting obligation lies not in the one off implementation, but on the successful transition to a BAU model. Given the number of challenges with the practical implementation of SFTR, Tier 2 banks need to think carefully in terms of operating model, especially when it comes to pre-matching, post TR matching and resolution of breaks. It is clear that the industry and the regulator will take some time to adjust the nuances of reporting post April 2020, however the banks need to be prepared for the onslaught of mismatches and breaks from day 1 of implementation.
Finperform consultants are detail oriented and understand the “practical” considerations on implementing SFTR.
If you would like further information on our approach on SFTR Implementation, please contact Suriya, our Managing Director at email@example.com