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Foolish to ignore SFTR challenges, BBH expert warns

03 February 2017

SFTR proposals are similar to EMIR but look to be more burdensome

It would be "foolish" for market participants to underestimate challenges inherent in satisfying a detailed, dual-sided, reporting regime such as SFTR, according to a regulatory expert at Boston-based bank BBH.

The EU regulation is designed to improve transparency and monitoring of securities financing transactions (SFTs), which includes securities lending, repurchase and reverse repurchase agreements (repos).

The measures proposed are similar to EMIR adopted in 2012, which introduced mandatory reporting for derivative transactions.

While most asset managers have begun preparations for these requirements, SFTR’s most significant and complex phase begins with the implementation of Article 4.

The implementation of Article 4 was originally set to occur in Q1 2018. However, the expected release date for ESMA's final Regulatory Technical Standards (RTS) has been revised to Q4 2017 so the  new probable  implementation  date, expected to occur one year later, is Q4 2018. 

"This phase introduces the mandatory reporting of individual SFTs," Garrett Berkery, BBH’s global head of risk management for the securities lending and currency administration products, explained in a recent online post.

"The industry will have one year from this date to comply."

Based on the draft technical specifications, Berkery believes the scope of required data fields is expansive.

For example, the jurisdiction and type of legal contract governing the transaction is not data typically stored at transaction level but must be reported per transaction under the new rules.

"The draft technical specifications also require that approximately 60 data fields be matched within very tight, or zero, tolerances," he added.

"This is approximately six times the number of fields required to match under EMIR."

As Berkery points out, unique aspect of the reporting requirements is that they apply to EU and third-country counterparties if the SFT is transacted through an EU branch of that third country counterparty.

"For example, a stock loan between a Japanese pension fund and the London branch of a Swiss bank would be included in the scope of the regulation because one party to the trade is an EU branch even though neither the lender nor the borrower’s principal office is in the EU."

Berkery warned that principals to SFTs "must engage" in 2017 to develop solutions for satisfying these complex filing requirements.

"Firms committed to satisfying them will need to conduct the classic build, buy, or outsource assessment.

"A year may appear to be enough time to finalize solutions but lessons learned from EMIR suggest otherwise," Berkery wrote.

This article as been amended to reflect the delay in the publication of ESMA's final Regulatory Technical Standards (RTS).

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