Another European regulation for global providers to worry about


The avalanche of new regulations over all aspects of financial services in Europe – and we’re not talking about financial advisors here, we’re talking about the engine room of the financial system – is having increasingly global ramifications. A new study by DTCC attests to the latest imposts.

The paper highlights the impact of securities finance trade reporting on the industry including collateral supply, liquidity and operations. It predicts that the industry will have to cope with “five times more reports than actual trades once the new regulation takes effect.

The study on the impact of the Securities Financing Transactions Regulation (SFTR) was jointly published by the Depository Trust & Clearing Corporation (DTCC), the major post-trade market infrastructure for the global financial services industry, and its consultancy partner, the Field Effect.

The paper also highlights that SFTR is likely to significantly impact trade booking models and affect 60 per cent of current processes resulting in the need to develop new processes. Furthermore, the new regime may create changes to sources of collateral supply within the market and the industry will need to make provisions to ensure that these unintended consequences do not result in collateral supply and liquidity issues.

Val Wotton, managing director and product development and strategy, for derivatives and collateral management, at DTCC, said: “This paper highlights the significant impact that SFTR implementation will have on the financial industry. While SFTR will be phased in starting in 2020, market participants must act now to be ready for implementation and to avoid any issues around trade reporting volumes, liquidity and collateral supply.”

For fund managers and other service providers outside of Europe, like other initiatives in recent years – such as Basel I, II, III and IV – the regulation is applicable to any firm operating on a global level.

To ensure readiness for SFTR implementation, the paper recommends that market participants:

  • Develop a reconciliation break strategy and ensure that efficient data management processes have been adequately reviewed. It is expected that matching rates will be very low on day one, due to the tolerances applied and current market practices, so breaks at trade repositories may be significant. Firms must ensure that reconciliation breaks can be managed appropriately;
  • Assess the impact of higher levels of disclosure required by SFTR on appropriate financing and prime broker businesses. Agent lender disclosures may no longer be fit for purpose while hedge funds leveraging prime brokers may be required to provide wholesale disclosure to regulators; and
  • Ensure greater levels of automation across the trading and operations functions to manage the expected increase in volumes.

The securities financing industry has much higher levels of manual processes than other product areas, making automation critical, according to the researchers.

Simon Davies, a senior consultant at the Field Effect, said: “Given the complexity and challenges around implementing the regulation and the impacts that it has on both market participants and the industry, firms should now be well underway with their planning and implementation. The role of the trade repository is pivotal to the success of the implementation of the regulation, and firms should look to leverage this in their reporting function.”

By way of background, SFTR is part of the European Union’s approach to meeting objectives set out by the Financial Stability Board (FSB) to increase transparency in the use of securities lending and repurchase transactions (repos). The regulation will soon require firms to report their securities financing transactions to an authorised trade repository registered by the European Securities and Markets Authority (ESMA).

While some firms have already begun preparing for the implementation in Europe, due to the global nature of the requirements, firms in other jurisdictions should be aware that similar mandates may be implemented to meet the FSB’s objectives.

– G.B.