As we come to the first anniversary of the implementation of the Securities Financing Transaction Regulation (SFTR) for the first cohort of companies, it seems timely to ask ourselves what we have learned. Jonathan Lee, senior regulatory reporting expert at Kaizen Reporting, shares his assessment
Despite the pandemic, and some would argue against all odds, the industry has kept its promises and should be given credit for doing so under such difficult circumstances. This can be seen in the trade repository acceptance rates, which were much higher than expected. However, before we get carried away, we need to remember that producing valid SFTR reports is the easy part.
The data turns out to be “valid but false”
One of the biggest issues highlighted in the first year is that the majority of reported activities, while passing validation, are in fact inaccurate. This is what we at Kaizen call the “valid but false” problem. A staggering 93% of SFTR reports tested by Kaizen for the first time have errors and a questionable population, typically reported with valid data (they follow trade repository validation rules) but in error.
Public domain data is of low quality but informative
Public data released weekly by trade repositories seems to indicate underreporting and double counting. Despite the aspirations, this data also has very little value to the industry in terms of making markets less opaque or countering asymmetries in market data. Underreporting, especially of guarantees, is an issue and an issue that may be subject to more regulatory oversight.
To report completely and accurately, reporting counterparties need specific details.
We also identify a lack of clarity in areas such as bilateral margin reporting, collateral reuse, and cash reinvestment reporting – and reporting of commodity finance transactions has led to an apparent lack of reporting. covering these areas. Despite repeated presentations from the industry before commissioning about the importance of the bilateral pension margin, this turned out to be an afterthought in the reporting taxonomy.
The reconciliations of trade repositories are far from perfect
The main mechanism put in place by regulators to promote data quality under the SFTR is the reconciliation of trade repositories. The general concept is that if both companies submit reports directly from their books and records, the transactions and post-trade lifecycle events should ultimately match. If both parties agree, this should provide assurance that the data is correct. However, this turned out to be a rather naive premise for two main reasons.
First, the vast majority of SFTR reports are one-sided and are not reconciled. According to DTCC, the Depository Trust and Clearing Corporation, these figures currently stand at 76 percent in the EU and 86 percent in the UK. In a recent Kaizen webinar, only 32 percent of participants surveyed appreciated the ineffectiveness of trade repository reconciliations (selecting the TR reconciliation level at 0-25 percent).
Second, SFTR was so ambitious in its data reporting requirements that a large portion of the reporting counterparties did not, and still do not have, enough benchmark or static data to complete a report. As a result, most of the data comes from third parties, not the reporting company’s books and records, and is of poor to poor quality. This data is well below the standard required to ensure that systemic risks are under control and that market manipulation is detectable.
So, despite a start to be saluted, there is still work to be done. As the second year approaches, companies should focus on the completeness and accuracy of their own reports. But these efforts must not come at the expense of the resources devoted to meeting the challenges of reconciling trade repositories.
Regular, periodic and comprehensive quality assurance of the universe through regulatory testing will provide a significant advantage in meeting the challenge of SFTR compliance.