Reflections of Post-SFTR Implementation of Phases I & II

It was more than five years ago, that I recall being asked to look at a new regulation called SFTR. Even though that conversation occurred that long ago, I still remember the moment when I was asked to identify impacts and developments that might be required. That same exchange undoubtedly will have taken place in many other firms.

Those that have worked on this regulation will at some point have spoken to one of the new legions of SFTR mages – masters of arcane regulatory lore, wielding mystical tomes of lever arch files decorated with worn but colourful tabs.

From an ISLA perspective, the effort applied to this one regulation has at times dwarfed all other projects. We have all lost count of the number of committees, task forces, working groups, workshops, and public debates we have been a part of or attended. The scope of this work has launched careers, generated new products, and enriched many a LinkedIn network. Its impacts have been felt in best practices, legal documentation, taxation, corporate actions, and supported the first steps into a standard data model for our industry. Today, we see the fruits of this labour condensed into a single on-line handbook, detailing fields, life cycles, and FAQs, alongside reams of documentation and new tools published to our website.

The SFTR journey is far from over however. Although it has just passed a very significant milestone, I am confident there are plenty of twists and turns still to come. The next phases of the journey will come in the shape of the implementation of phases 3 & 4, further clarifications from regulators, and of course the potential SFTR mark II to address missing fields and other assorted issues.

From 13 July and during phases I and II, credit institutions, investment firms, CCPs and CSDs began reporting their data to trade repositories. This data, now in the public domain, crystallises issues and challenges which until now have been only partially been tested or discussed as theoretical edge cases. From a volume perspective, securities lending trades accounted for some one million of all transactions reported in the first week. It should be remembered this was only a subset of the entire market, as only new transactions booked since go-live date have been reported. That said, this still represents a large body of data which based on early feedback, is working well. To illustrate that success, we understand that around 95% of transactions reported are being accepted by the trade repositories, testament to the extraordinary industry preparations.

These are however only the first days of reporting, and so not unexpectedly tweaks will need to be made. For example, some firms data outputs will require refining, whilst others are ironing out reconciliation breaks caused by different treatments of life cycle events, also referred to as ‘event choreography’. Our old favourite, the ‘Issuer LEI’, which renders securities as unreportable where the required Legal Entity Identifier (LEI) has not been registered. In a recent ISLA working group, we discussed these issues and will collect more feedback as this process matures. We also expect to see another growth spurt with phase III and IV in October 2020 and January 2021 respectively. Each issue will be resolved either by an addition or amend to the current consensus driven best practice, whilst the more problematic issues will be brought to the attention of ESMA. Over time, two notable trends will appear; the first being that issues and challenges will diminish as they are resolved, whilst the second will be that data volumes will increase as old trades mature and are replaced with new loans captured by the scope of the regulation. This final growth is expected to peak in approximately two to three months, its arrival marked by reported loan balances beginning to match the reported collateral.

At that stage, many will start asking the question, “What has SFTR done to the securities lending market?”. One easy initial response might be that it has finally addressed the Financial Stability Board (FSB) transparency recommendations of 2013 (although it may take some time before we see what this extraordinary collection of data looks like). We should also keep our eye on current market reporting processes to check that the picture it creates is aligned to the one used in day-to-day trading.

There is another associated win from this regulation though, specifically the added momentum it has imparted to industry standardisation. Not just in common reference points like LEIs, or expressions of life cycle management to populate regulatory reporting, but the increased use of standardised, modular data schemas such as ISO 20022. This next step in the market’s evolution is outlined in ISLA’s 2019 paper, An Agenda for Change, which can already be seen triggering work in our legal and digital working groups and related pilot studies. We see the same reflected throughout the financial industry, through the work of other trade associations and regulatory bodies. If the digitalisation of our industry progresses as many hope, it could improve transparency even further than SFTR, and deliver associated benefits for both market participants and regulators alike. The knowledge gathered by those SFTR mages over the past years, is going to come in very handy for our industry’s next steps.

For any questions, please contact us through

Adrian Dale, Head of Regulation & Market Practice


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