The effective management of counterparty credit risk continues to be a challenge for capital markets firms; over the past decade this has led to multiple regulations designed to keep banks’ exposures within acceptable parameters, to mitigate potential losses, and to enable participants maintain safe and secure levels of capital.

In line with this requirement, ESMA’s Security Financing Transaction Regulation (SFTR) is the latest regulation designed to both reduce systemic risk and increase transparency for investors trying to negotiate often opaque markets in the shadow-banking sector. SFTR will be first applied to banks and investment firms that trade Securities Financing Transactions (SFTs) from April 2020.

Reporting obligations under SFTR will be similar to those already applicable to derivatives transactions under EMIR, but with some key differences – not least the structure, content and granularity of the reference data required to meet these obligations.

Whereas EMIR reporting requires 129 data fields, SFTR specifies 153 data attributes be transmitted per transaction across 4 categories (margin, transaction, reuse and counterparty) in xml. format, whilst complying with ISO20022 messaging standards.

Although not all of these fields will be mandatory under SFTR, it’s reasonable to assume that not all of the required data will be readily available. Indeed, there are marketplace concerns over how to reliably source two key mandatory attributes – Legal Entity Identifiers (LEI) and Unique Transaction Identifiers (UTI). In a market research exercise conducted by Excelian Luxoft earlier in the year, nearly half (47%) of the participating firms confirmed that their trading infrastructure was unable to reliably cope with the generation of LEIs and UTIs.

LEIs will operate as the primary mechanism for identifying both counterparties to a SFT. However, many firms currently use internal codes to identify counterparties and do not retain LEIs in their primary books and records systems. Furthermore, LEI reporting under SFTR will be required at the branch level, whereas EMIR previously only required reporting at a head office level. Market participants will therefore need to consider how best to calibrate LEI request & registration processes at lower levels of granularity.

Matching UTIs will need be included on all SFTs by both counterparties and UTIs will have to be generated and promptly communicated by each counterparty. This requirement creates several challenges for firms; SFTs booked directly in front office systems will not typically be automatically assigned a UTI, UTI source information for agency loans will only be generated after the settlement date and finally, SFT industry infrastructure is limited in its ability to generate timestamps unless SFTs are traded on a market platform such as Bloomberg, Pirum or Equilend.

The accurate and timely generation of both LEIs and UTIs are central to the proposed ‘two-way key’ system under SFTR that will enable counterparties to ‘handshake’ on transactions and meet their daily reporting obligations. Systemic reference data failures in relation to either LEIs or UTIs will quickly lead to market participants breaching their reporting obligations to Trade Repositories and the rapid build-up of unreconciled backlogs.

In order to avoid many of transaction reporting / reconciliation issues that the market experienced under EMIR, firms must grasp the reference data ‘nettle’, an implementation challenge often underestimated in significant regulatory programme deliveries. Identifying ‘clean’ and reliable data sources, developing a robust data model that allows scope for reuse across multiple regulations, and using flexible and scalable data storage solutions will all prove to be central to solving for the SFTR reference data challenge.
Marilena Sidella
Marilena is a Principal Consultant within the Vendor Solutions practice with expertise as a Business Analyst with technical skill set and Murex SME in Reporting. For more than 15 years, she has been working in Private Banks, Investment Banks and Trading Companies. She is an expert in Client and Bank Reporting solutions including Regulatory and is a certified Trainer, Vendor Integration Analyst, Data Models and Process Management and Regulatory Domain (EMIR, MiFID II, SFTR) specialist. Marilena faces off to Business Management and IT Teams (functional and technical) including Off-shore and Senior Management.