Philipp Rothermich, principal consultant at Comyno, outlines why SFTR continues to challenge the industry, and why the responsibility of reporting is now given to operations, treasury or middle office departments
Fulfilling the requirements of the Securities Finance Transaction Regulation (SFTR) ties up a lot of internal resources for the broad range of institutions that have to perform SFTR reporting.
Some firms have heavily invested in the development of internal SFTR solutions at great cost, both for implementation and maintenance. For those particular firms, there is little reprieve in sight, with more regulations and investments on the horizon.
Optimising or outsourcing in-house solutions help clients to take pressure off IT departments who, in most cases, have limited resources and are struggling with other infrastructure challenges and initiatives.
The responsibility of reporting is often put on those in operations, treasury or middle office departments. A professional and technical understanding plus IT support is necessary in most cases. The responsible departments are often struggling with manual workarounds, missing validation processes and user-friendly graphical user interfaces (GUIs).
Comyno’s best practice
Pre-validation processes help banks to identify potential missing or incorrect data or non-compliance with the European Securities and Markets Authority (ESMA) validation criteria. Therefore, it helps to minimise the manual effort by an internal ex-ante validation of the report to be submitted, while avoiding ex-post-trade corrections. Paired and matched reports in the initial submission can reduce the SFTR-related operational costs by up to 80 per cent.
According to ESMA’s data quality report, as of end 2021, matching rates of loan components sat just below 50 per cent, while collateral components were at around 20 per cent.
Given these statistics, GUIs showing and highlighting the breaks are a critical software component, saving operations and IT resources.
Some SFTR solutions still require a lot of technical understanding when reading the extensible markup language-messages due to the lack of sophisticated technical solutions. A range of different complex reports are sent from the trade repository to the end-user and each needs to be analysed in a specific way.
An automated interpretation and pre-processing of those feedbacks is a mandatory software requirement to increase operational efficiency and to meet the regulatory obligation. This becomes even more important considering an increasing focus of the national competent authorities (NCAs) on the matching of the reports.
Good software solutions help to identify gaps in the data set. While much of an attention has already been put to timely reporting, many more improvements in the area of reconciliation are needed. Those areas will continue to be a point of focus for ESMA and the NCA going forward, according to the aforementioned ESMA data quality report. Achieving improvements in areas where insufficient quality of data is identified is one of the key objectives of ESMA and the NCAs. The low matching rates show that a lot of actions and coordination with other counterparties continues to be done on the firm’s side.
Beside missing technical know-how, another drawback is the lack of SFTR business expertise. Even the best tool is useless without knowing how to use it. A lack of expertise around SFTR and recruiting for this expertise is one of the industry’s biggest challenges and remains a cause for concern. Firms are still seeking employees with the required skills to improve their internal processes and workflows.
One of the services many banks offer to their counterparties or customers is delegated reporting. To provide evidence that the reporting was done properly, it is best practice for banks to provide their counterparties or clients a report which lists all reports and their reporting status, as the delegating entity remains in charge of the reports provided, and will be the initial contact for their NCAs on reporting issues.
Ongoing releases of the trade repositories and changes in the ESMA reporting schema cause changes in the SFTR reporting. Firms are still facing challenges in dealing with internal SFTR processes, while external influences start to build up. Trade repositories and changes in the reporting schema by ESMA keep firms busy with releases which have to be adopted by each firm while they are still busy optimising their internal operational processes. This is all while they also fix bugs in the software and aim to improve instrument static data.
Make or buy
Some solution providers failed before starting, and some trade repositories quit a few months after go-live. SFTR is the “Big Bang” of reporting requirements in the securities finance space. The Big Bang has often morphed into a “data jungle” with costs and efforts getting out of control.
While many firms chose to build their own SFTR solution, others bought an external solution. Many software providers underestimated the continued effort of implementing releases and data quality challenges. Some in-house solutions have even bigger gaps and cannot assemble the best practices of different SFTR users.
It is not too late to review the decision and it is time to rethink it, if the current internal approach is carried out in a sustainable manner. To grapple with a bad SFTR solution for the next decade is costly – whether or not it is an internal or external solution.
Integrate a solution in the existing environment
An in-house development solution may lack flexibility and functionality, resulting in increasing maintenance costs and testing efforts over time. The SFTR reporting will certainly need further adaptations over the coming years. This means that additional costs arise when the adaptation of the SFTR reporting requirements take place.
Standard software usually offers a large number of predefined interfaces to the peripheral systems.
Normally, these already contain the needed attributes and only need to be adjusted individually.
The provider will supply business and IT resources for implementation and testing of the new functionalities.
If the solution is in place for customers, further positive effects can be gained by the customer.
Comyno, with its business expertise and its SFTR solution, can provide a standard technical solution, implementing releases as part of the software license agreement — giving clients access to business experts.
Our solution allows clients to import all the reports they did before, so that they have all their reports in a single place, from day one. A rich GUI functionality with the required connectivity to a clients’ core banking system and the trade repository is also part of the offered solution.
