Industry reacts to SFTRâs guidelines
08 January London
Image: Shutterstock
As the dust settles following the release of the Securities Financing Transactions Regulationâs (SFTR) , the securities lending industry has had its say on the incoming reporting regime.
The first phase of SFTR is due to come into force on 13 April for investment firms and credit institutions, and July for central counterparties and central securities depositories.
Multiple market participants were quick to praise the European Securities and Market Authorityâs (ESMA) decision to allow a 12-month grace period for the legal entity identifiers (LEI) requirement for third-country issuers, which was set to come in as part of phase one.
Dean Bruyns, senior director, message automation product management, at Broadridge, tells SLT that âa collective sigh of relief would have greeted the news that the âno LEI â no tradeâ stance in third-country securities has been granted temporary reliefâ.
âThis gives the industry time to lobby the issuers of securities to ensure that they obtain LEIs by April 2021,â he adds.
Bruyns further explains that the impact of being unable to trade in securities without issuer LEIs would have been âconsiderableâ and had a âdetrimental effect on liquidity and fails in the marketâ.
The scale of the market disruption being avoided through the application of the reprive was also outlined by EquiLend, which stated on Monday that requiring third-country LEIs from April âwould have severely impacted market liquidityâ.
In its report on the final guidelines, ESMA noted that, on average, 88 percent of instruments issued by EU issuers have an LEI code, compared to an average of 30 percent from non-EU jurisdictions.
Due to the clear disparity in issuer readiness levels, the EU watchdog noted in its report that âconsidering the still unsatisfactory level of LEI coverage on the global scaleâ it was adjusting its rules in order to âensure the smooth introduction of the SFTR reporting regimeâ.
However, multiple industry figures observed that the delay did not resolve all concerns around SFTRâs fast-approaching go-live date.
Pirum Systems' head of SFTR business development, Simon Davies, tells SLT that although the delayed implementation for third-country issuers is a positive step, the fact that more than 10 percent of European securities are missing LEIs means âthere will still be an impact on the industry when reporting starts, and firms need to carefully assess the impact this will have on trading, collateral and reporting capabilitiesâ.
Broadridgeâs Bruyns also emphasises that it is âcritical that a proactive approach is taken to significantly increase the adoption of LEIs over the next 15 months,â adding that some issuers may be slightly reluctant to do so.
âAfter all, it's difficult for traders to short their security where there is no borrow allowed in it,â he notes.
Elsewhere, market participants have begun to pore over the other changes in the level three text, compared to earlier drafts.
Bruyns explains that another win for the industry came in ESMAâs acquiescence to industry consensus on the reporting of cash-driven securities lending transactions. The issue, he says, was that these trades have âmore repo-like characteristics than traditional stock loans and fit better within the repo reporting templateâ.
Following last yearâs consultation on the matter, ESMA has now stated that these transactions should be reported as repos.
âThis makes sense, the challenge, however, is that counterparties will now need a way of identifying the intention of the stock loan to determine whether to report it as a stock loan or a repo,â Bruyns says.
As a result, a method of quickly identifying these types of trades will need to be factored into the implementation of SFTR reporting solutions.
Other key areas to review in the final text, according to Pirum, include the timing of event reports, agreement of collateral quality, valuations, pricing and foreign exchange sources, along with margin loan reporting and variation margin on repos.
Although initial responses to the release were largely positive, some lingering concerns have already been raised.
Sunil Daswani, senior securities lending and repo consultant at MarketAxessâ reporting subsidiary, Trax, tells SLT that there are still outstanding issues around front-load backloading, time-stamp validations, settlement (contractual versus actual), lifecycle events, haircuts, collateral quality, securities re-use and corporate actions in general.
Daswani also advocates for further discussions with clients and counterparties on the importance of bilateral âoutreachâ via the template questionnaires created by the International Securities Lending Association and International Captial Market Association.
He says that MarketAxess is proactively pursuing these discussions in order to âensure further education on the regulation and coordination prior to go-liveâ.
âIt is important to resolve issues around misunderstanding between either party reporting a transaction leading to unnecessary exceptions,â he adds.
The first phase of SFTR is due to come into force on 13 April for investment firms and credit institutions, and July for central counterparties and central securities depositories.
Multiple market participants were quick to praise the European Securities and Market Authorityâs (ESMA) decision to allow a 12-month grace period for the legal entity identifiers (LEI) requirement for third-country issuers, which was set to come in as part of phase one.
Dean Bruyns, senior director, message automation product management, at Broadridge, tells SLT that âa collective sigh of relief would have greeted the news that the âno LEI â no tradeâ stance in third-country securities has been granted temporary reliefâ.
âThis gives the industry time to lobby the issuers of securities to ensure that they obtain LEIs by April 2021,â he adds.
Bruyns further explains that the impact of being unable to trade in securities without issuer LEIs would have been âconsiderableâ and had a âdetrimental effect on liquidity and fails in the marketâ.
The scale of the market disruption being avoided through the application of the reprive was also outlined by EquiLend, which stated on Monday that requiring third-country LEIs from April âwould have severely impacted market liquidityâ.
In its report on the final guidelines, ESMA noted that, on average, 88 percent of instruments issued by EU issuers have an LEI code, compared to an average of 30 percent from non-EU jurisdictions.
Due to the clear disparity in issuer readiness levels, the EU watchdog noted in its report that âconsidering the still unsatisfactory level of LEI coverage on the global scaleâ it was adjusting its rules in order to âensure the smooth introduction of the SFTR reporting regimeâ.
However, multiple industry figures observed that the delay did not resolve all concerns around SFTRâs fast-approaching go-live date.
Pirum Systems' head of SFTR business development, Simon Davies, tells SLT that although the delayed implementation for third-country issuers is a positive step, the fact that more than 10 percent of European securities are missing LEIs means âthere will still be an impact on the industry when reporting starts, and firms need to carefully assess the impact this will have on trading, collateral and reporting capabilitiesâ.
Broadridgeâs Bruyns also emphasises that it is âcritical that a proactive approach is taken to significantly increase the adoption of LEIs over the next 15 months,â adding that some issuers may be slightly reluctant to do so.
âAfter all, it's difficult for traders to short their security where there is no borrow allowed in it,â he notes.
Elsewhere, market participants have begun to pore over the other changes in the level three text, compared to earlier drafts.
Bruyns explains that another win for the industry came in ESMAâs acquiescence to industry consensus on the reporting of cash-driven securities lending transactions. The issue, he says, was that these trades have âmore repo-like characteristics than traditional stock loans and fit better within the repo reporting templateâ.
Following last yearâs consultation on the matter, ESMA has now stated that these transactions should be reported as repos.
âThis makes sense, the challenge, however, is that counterparties will now need a way of identifying the intention of the stock loan to determine whether to report it as a stock loan or a repo,â Bruyns says.
As a result, a method of quickly identifying these types of trades will need to be factored into the implementation of SFTR reporting solutions.
Other key areas to review in the final text, according to Pirum, include the timing of event reports, agreement of collateral quality, valuations, pricing and foreign exchange sources, along with margin loan reporting and variation margin on repos.
Although initial responses to the release were largely positive, some lingering concerns have already been raised.
Sunil Daswani, senior securities lending and repo consultant at MarketAxessâ reporting subsidiary, Trax, tells SLT that there are still outstanding issues around front-load backloading, time-stamp validations, settlement (contractual versus actual), lifecycle events, haircuts, collateral quality, securities re-use and corporate actions in general.
Daswani also advocates for further discussions with clients and counterparties on the importance of bilateral âoutreachâ via the template questionnaires created by the International Securities Lending Association and International Captial Market Association.
He says that MarketAxess is proactively pursuing these discussions in order to âensure further education on the regulation and coordination prior to go-liveâ.
âIt is important to resolve issues around misunderstanding between either party reporting a transaction leading to unnecessary exceptions,â he adds.
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