Market participants have welcomed the level 3 guidelines from the European Securities and Markets Association (Esma) on the impending Securities Financing Transactions Regulation (SFTR), published on January 6.

However, some have also claimed that a further round of clarity would benefit the industry.

Sunil Daswani, head of business development for securities lending solutions at MarketAxess, argued another level would be “welcomed by the industry”, but it would need to come “very soon”.

“There are still questions that are being asked and a lack of clarification in various areas, so I think another round of clarification would be very welcomed.”

Daswani highlighted a concern surrounding timestamps and whether they are necessary under SFTR because they “remain one of the matching elements of the reconcilable fields between the two counterparties, with a very short tolerance of a couple of hours”.

“As a result of that, depending on different systems and time zones (used by market participants), it remains a significant challenge,” he explained.

On the other hand, Simon Davies, head of SFTR business development at Pirum, acknowledged there will continue to be outstanding questions for the regulator that will “require some further guidance”, but claimed that Esma’s level 3 text is “detailed enough” and believes that the industry “needs to get on” with implementing what is required.

The one concern raised by Davies was on the requirement to use market values as opposed to loan values along with foreign exchange (FX) rates in pricing calculations, stating that this could “cause a headache for some firms”.

He also commented on the treatment and timing of life-cycle events, which have been made “much clearer”, but still need to be “carefully reviewed” as the impact on firms will be mixed – benefitting some and disadvantaging others, depending on their booking practices.

“The industry bodies are doing a fantastic job in co-ordinating the collective understanding of what’s required and liaising with Esma where required,” he said.

Alongside the guidelines, Europe’s financial watchdog also published a statement on Legal Entity Identifiers (LEIs), addressing the disparity on LEI coverage for European and third-country jurisdictions and noting that 88% of instruments issued by EU issuers have an LEI code, against a non-EU average of 30%.

In light of this, Esma will allow a period of up to twelve-months - starting from April 13 - where reports without the LEI of third-country issuers will be accepted.

Many have welcomed the move from the authority, but John Arnesen, consulting lead at Pierpoint Financial Consulting, noted that the period is “very short” and has questioned whether an issuer in a third country will be “incentivised” to change behaviour.

“If they haven’t sought a LEI by now, why would they do so in the future?” he questioned.

“To hear it’s needed in order to satisfy a European regulation to use their debt or equity as collateral isn’t a strong motivator. It appears Esma expects agent lenders and tri-party agents to involve themselves, but I question how effective that will be. I fear we may be back with the same liquidity concerns in March 2021,” he concluded.

Ed Oliver, managing director, product development at eSecLending, voiced a similar opinion.

He welcomed the ‘grace period’ given the potential impact to liquidity for both loans and collateral, which could have resulted if the twelve-month allowance had not been introduced, but underlined that Esma is insistent that LEIs will be required afterwards.

“It is incumbent on the securities finance industry to establish how to navigate the various authorities responsible for security numbering to ensure that the LEI issuance for third country issuers is where it needs to be at the end of the grace period,” Oliver added.

Previously, it was speculated that the go-live date of SFTR could be delayed, but the authority put an end to that in its guidelines, reaffirming that SFTR will go live on April 11 and be enforced from the following working day, April 13.

Davies stressed that firms “really need to start ramping up” their efforts and get “as much testing done” prior to the go-live date.

“There is a real opportunity here to get good quality reports on day one of reporting, that we’ve not really seen with other regulations,” he said.

Arnesen noted that it is “no surprise” that Esma has taken a “no ifs, ands or buts” in relation to the go-live date and predicted that we could see a revised version of SFTR, which he dubbed “SFTR II”, sometime in 2022 or 2023.

“As with any regulation of this magnitude some lessons will only be learned during the application of the actual reporting process,” he concluded.

Despite the concerns, it appears as though Esma’s guidelines have received a warm welcome from the industry, with many market participants seeing the benefits of the regime while also gaining a greater understanding of what is expected of those firms in scope.

“Both the final report and the guidance gives a lot of clarity on many of the outstanding questions the industry has, and is very much welcomed by us and all our clients,” Davies added.

Oliver noted that the guidelines have provided clarity on a number of items, not least the go-live, but also back-loading, settlement reporting and reporting of credit quality of securities.

“The outstanding issues raised have in some areas been solved by cross comparison from the respondents so it appears Esma have dedicated some considerable time in collating all outstanding issues,” Arnesen observed.