The author of a new book on European rules impacting securities lending and repo markets says there is a lack of understanding across the industry on upcoming reporting requirements.

Seb Malik, who wrote financial bestseller ‘Mifid II: A survival guide’, has published a new paperback on the European Union’s (EU) Securities Financing Transaction Regulation (SFTR).

Despite reuse and disclosure requirements of SFTR already being live, the most burdensome aspect involves transaction reporting obligations which are expected to kick in around the second or third quarter of 2019.

The European Securities and Markets Authority (Esma) has submitted the final reporting technical standards to the European Commission which is expected to sign off the bill shortly.

Esma itself has said that a lack of preparation time and inconsistent implementation are the two biggest threats which could hamper the introduction of SFTR reporting.

However, London-based Malik says a more worrying concern is that a significant number of market participants, particularly certain trade repositories, appear to lack technical understanding.

“Mifid II transaction reporting was certainly complex, but SFTR’s complexity is unprecedented,” Malik told Global Investor. 

“The trade repositories’ SFTR strategy seems to be: put out cover articles for now that say nothing of substance but create the impression they’re on top of it.”

“Some appear to want the lenders and vendors to do the heavy lifting and then swing in at the end and accept the enriched data for final reporting, collecting tidy fees in the process.”

Malik told Global Investor that mistakes are so egregious that certain key participants had not yet grasped the elementary aspects such as which transactions are reportable.

He added: "The availability of counterparty and collateral data – especially in pooled and net exposure scenarios – is simply not yet there by T+1. There is a scramble towards greater electronification which is, ultimately, good news for investors."

Meanwhile, Malik considers IHS Markit one of the best prepared firms regarding SFTR reporting.

Morgan Stanley and Citi are among the latest firms to sign up to use IHS Markit’s securities finance trade reporting tool, built in partnership with Pirum.

IHS Markit has also signed deals with trade repositories including the London Stock Exchange Group’s UnaVista.

Other vendors, such as EquiLend and Trax, are working together on a reporting tool to handle SFTR.

Malik, who has worked at Barclays, Credit Suisse and JP Morgan during his career, accepts that it’s easy to become lost and confused in the layers upon layers of requirements mandated by the regulator for firms to comply with in time for the go live date.

That’s part of the reason he has focused on SFTR following his work on Mifid II, the EU’s sweeping post-crisis reform which went live at the start of 2018.

Mifid II is designed to enhance protection for investors and inject more transparency into all asset classes: from equities to fixed income, exchange traded funds and foreign exchange.

Similar to the reporting of derivatives to trade repositories under European Market Infrastructure Regulation (Emir), which Malik has also studied, SFTR takes the same concept and applies it to the securities finance market.

There are 4 tables, 6 report types, 10 action types and permutations of the same resulting in up to 153 data fields that need to be reported and each transaction requires a Unique Transaction Identifier (UTI) – except collateral reuse.

Prime brokerage margin lending accounts will have only one UTI per account. Triggers for reporting are numerous and many transactions will require multiple different daily reporting updates until maturity.

‘You can, thus, see why many firms are cowering in the corner,’ said Malik, who is now head of financial regulation and the author of SFTR transaction reporting training at Market FinReg.

The vast amount of data required has caused some to question what, exactly, regulators will do with the information.

However Malik, who is also running training courses on SFTR, says regulators will get what they need from the data regardless.

Esma has stated the data will be used to monitor of risks to financial stability in the EU, particularly the build-up of leverage, exposures and calculation of named and sector positions in SFTs and the interconnectedness of entities.

Monitoring liquidity and maturity transformation, jurisdiction exposures and various collateral aspects, including reuse, have also been noted by the regulator.

“Unfortunately for the merchants of doom and gloom, SFTR is but the starting point. Regulators will analyse data and take subsequent mitigating action in the years to come – not least the implementation of the outstanding FSB recommendations 12-18 on setting collateral haircut levels,” Malik concluded.