It was more than five years ago that Adrian Dale, head of Regulation and Market Practice at the International Securities Lending Association, recalls being asked to look at a new regulation called SFTR (Securities Financing Transactions Regulation). In a recent post, he writes about what the industry is facing next.
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. The SFTR journey is far from over however. Although it has just passed a very significant milestone, 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 and 4, further clarifications from regulators, and of course the potential SFTR mark II to address missing fields and other assorted issues.
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, ISLA understands that around 95% of transactions reported are being accepted by the trade repositories, a 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. 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 (European Securities and Markets Authority).
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). The industry should also keep an 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 standardization. Not just in common reference points like LEIs, or expressions of life cycle management to populate regulatory reporting, but the increased use of standardized, modular data schemas such as ISO 20022.
If the digitalization 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.