SFTR Data Preparation: What you need to know

 

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In the years since the financial crisis, European regulators have been taking steps to increase confidence in the financial ecosystem, ushering in new rules to improve transparency, protect financial stability and mitigate future threats.

To date, firms have already digested the European Market Infrastructure Regulation in 2013 and the second iteration of Markets in Financial Instruments Directive (MiFID II) in 2018. Their next major challenge will be their upcoming responsibilities under the Securities Financing Transactions Regulation (SFTR).

From 11 April 2020, investment firms, banks and companies operating in jurisdictions classified as ‘third countries’ by the European Union, must report any securities financing transactions to a trade repository registered with the European Securities and Markets Authority. These transactions include securities lending, liquidity and collateral swaps, repurchase agreements (repos) or any other sell/buy-back transactions.

Pension funds, insurers, reinsurers, alternative investment funds and UCITS funds have a few months longer to comply, with their deadline set at 2 October 2020, while all non-financial institutions must report their transactions from 4 January 2021.

Understanding the challenge

Half of market participants responding to UnaVista’s webinar How to prepare your data for reporting said they considered the breadth of data fields to be the most concerning issue with the forthcoming regulations.

Under the new rules, firms will have to send comprehensive reports of their SFTs to their trade repository within a day of the transaction. They will also be required to store full details of these transactions for a minimum of five years. These new rules are certainly comprehensive.

In fact, firms will have to complete up to 155 separate data fields for every transaction, with the exact number of fields dependant on the type of trade. Unsurprisingly, market participants are nervous.

Much of the required data that firms hold on these transactions are currently scattered across multiple systems in their organisation. In addition, some companies don’t currently capture the required data in around a third of the necessary fields.

Meeting the SFTR requirements will mean a new approach for many firms, with systems remodelling necessary to track these new fields for the first time. To do this, they will need to identify where the data gaps lie.

Ways of testing

The scale of the task may seem daunting, but there is plenty of help available. Having applied to be an authorised trade repository for SFTR, UnaVista is encouraging firms to use some of its preparatory tools. It already assists its clients to meet their reporting requirements under the Markets in Financial Instruments Regulations and EMIR, by carrying out reference data checks on any reports supplied. And it is currently in the process of enriching that process further with other reference data that is relevant to SFTR.

For those firms who need help prior to the ‘go live’ date, UnaVista has developed its Accelerator tool, which allows them to test the quality of their SFT data against the required technical standards and refine their reporting process accordingly.

The Accelerator allows firms to test their reporting process against full XML and field validation, with an option to exclude individual fields from testing to improve reporting quality in a project-managed environment. 

The importance of early testing cannot be over-emphasised. In the lead up to the deadline for MiFIR, some firms were nearly caught out by leaving testing late. Incredibly, a handful of companies that were due to be compliant by 3 January, were still testing on New Year’s Eve!

Reconciliation awareness

Under SFTR, the accuracy of data will be closely watched by regulators following the implementation dates. This is because data reported to authorised trade repositories will be reconciled by regulators, to give them a better understanding of risks that may be hidden in the financial system. It will also provide a more complete picture of the relationships that exist between market participants.

SFTR demands both mandatory trade repository reconciliation, and inter-trade repository reconciliation, as there is under EMIR.

Initially, to ensure that the matching process is successful, the reconciliation process will focus solely on 57 data fields at launch. Gradually, over four phases, the number of fields will be expanded, with new fields added after nine months, 24 months and 33 months after the April 2020 ‘go live’ date.

Despite this planned phased approach, 27% of market participants polled in UnaVista’s data reporting webinar said that reconciliation was likely to be the source of the biggest SFTR headache.

It is certainly true that, as tolerances are expected to be tight on some of these reconciliations, firms are best advised to test their data quality, in advance of the compliance deadline. Further details of how to do so are available in the aforementioned webinar