DTCC paper reveals the huge scale of the compliance burden of securities finance trade reporting

Source: DTCC

A paper on the impact of the Securities Financing Transactions Regulation (SFTR) reveals that transaction reporting for securities financing trades may create five times as many reports as trades when the regulation takes effect, which is expected in early 2020.

The paper was jointly published by The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry, and its consultancy partner: The Field Effect.

The paper also highlights that SFTR is likely to significantly impact trade booking models and affect 60% of current processes resulting in the need to develop new processes. Furthermore, the new regime may create changes to sources of collateral supply within the market and the industry will need to make provisions to ensure that these unintended consequences do not result in collateral supply and liquidity issues.

“This paper highlights the significant impact that SFTR implementation will have on the financial industry,” said Val Wotton, Managing Director, Product Development and Strategy, Derivatives and Collateral Management at DTCC. “While SFTR will be phased in starting in 2020, market participants must act now to be ready for implementation and to avoid any issues around trade reporting volumes, liquidity and collateral supply.”

To ensure readiness for SFTR implementation, the paper recommends that market participants:

• Develop a reconciliation break strategy and ensure that efficient data management processes have been adequately reviewed. It is expected that matching rates will be very low on day one, due to the tolerances applied and current market practices, so breaks at trade repositories may be significant. Firms must ensure that reconciliation breaks can be managed appropriately;

• Assess the impact of higher levels of disclosure required by SFTR on appropriate financing and prime broker businesses. Agent lender disclosures may no longer be fit for purpose while hedge funds leveraging prime brokers may be required to provide wholesale disclosure to regulators; and

• Ensure greater levels of automation across the trading and operations functions to manage the expected increase in volumes. The securities financing industry has much higher levels of manual processes than other product areas, making automation critical.

Simon Davies, Senior Consultant at The Field Effect, said, “Given the complexity and challenges around implementing the regulation and the impacts that it has on both market participants and the industry, firms should now be well underway with their planning and implementation. The role of the trade repository is pivotal to the success of the implementation of the regulation, and firms should look to leverage this in their reporting function.”

SFTR is part of the European Union’s approach to meeting objectives set out by the Financial Stability Board (FSB) to increase transparency in the use of securities lending and repurchase transactions (repos). The regulation will soon require firms to report their securities financing transactions to an authorized trade repository registered by the European Securities and Markets Authority (ESMA). While some firms have already begun preparing for the implementation in Europe, due to the global nature of the requirements, firms in other jurisdictions should be aware that similar mandates may be implemented to meet the FSB’s objectives.

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