With the implementation of Securities Financing Transaction Regulation (SFTR) just one month away, the sell side is largely well prepared for the go live date on July 13, although some unresolved issues remain such as the reconciliation process and the reporting of lifecycle events. It is generally accepted that these wrinkles may only be ironed out after the regulation goes live in July allowing firms to work through any remaining difficulties or in the fullness of time through changes to the regulation. Therefore, firms should not view July 13 as the end of SFTR projects, but rather as a new era during which the industry will address issues through practical implementation.

The first area firms must explore is around unresolved issues in the reconciliation process, which involves the pairing and matching of trades and collateral.  As SFTR is a dual-sided reporting regime where both counterparties are required to report trades, the details of the trade and collateral must be matched and, where they don’t match, the data must be updated until they do. In addition to unprecedented stringency in matching requirements, this process will be more complex than ever before, especially when counterparties use different trade repositories (TRs) due to unforeseen differences that may arise in the validation, processing and reconciliation logic across the TRs. It is also the first time TRs are reconciling in an XML format. As a result, numerous matching issues are likely to require attention after SFTR reporting begins.

Another area that will require resolution is ‘lifecycling’. Under SFTR, reporting takes place on a position basis as opposed to more straightforward reporting regimes such as Mifir where reporting is on a standalone transaction basis. As a result, firms will need to clarify how lifecycle events – including modifications and amendments related to transactions - should be reported as well as how this data should be sequenced, as well as ensuring this is in line with how their counterparty is reporting the same trade.  While ESMA has endeavoured to provide this guidance to the industry via published guidelines, it is unrealistic to assume every scenario has been foreseen, as evidenced by the ongoing concern over how to report variation margin for repos, as well as confusion around the ‘late’ reporting of backdated events.

Longer term, the sell side may experience a challenge related to phase 3 of the regulation which takes effect on October 12 2020, when reporting goes live for insurance firms, UCITS and pension funds.  At that time, the sell side may be required to offer delegated reporting for the buy side, which enables a counterparty to a trade or a third-party provider to report on behalf of the other counterparty to the trade. Covid-19 led to a three month delay of SFTR implementation for the sell side, and while this was welcome relief, it has still created an ambitious compliance timeframe. Sell side firms will only have been reporting under SFTR for three months themselves come October, and are likely to be dealing with their own teething problems.

Furthermore, delegated reporting itself may also prove to be tricky post-October deadline. For instance, collateral reuse must be reported and aggregated at an entity level; therefore, if a firm is using multiple brokers and has delegated reporting to some or all of them, one single broker will likely not have access to all the requisite information for its client. Additionally, the broker may not know how much of the collateral it may have provided to its client has been reused, unless the client specifically communicates this data, and the client may not want to divulge that information. With the buy-side commencing reporting in October, it will be interesting to see if Agent Lender Disclosure issues have been overcome by then, similarly if data that has been submitted matches at reconciliation.

It is clear that the sell side has put significant work into their SFTR preparations ahead of the July implementation, an even more impressive accomplishment when we consider that project teams have had to work remotely and in highly unusual circumstances as a result of Covid-19. It appears that this focus has prepared the primary in-scope market participants for go live, but following implementation, the sell side must quickly move to resolve any remaining issues in order to be ready for buy-side implementation in October. A hallmark of successful implementation will be the ability to demonstrate to regulators that robust SFTR project teams remain in place, following a strict governance model as they address outstanding challenges. For the sell-side, the July 13 go-live is not the end of preparation, but the beginning of the next phase in SFTR implementation.