Securities Finance Monitor spoke with Catherine Talks, Product Manager at UnaVista, about ESMA’s final Guidelines for SFTR reporting released last week. Our conversation untangled the technical language of the documentation into what this means for the industry. Beyond the familiar SFTR slogan of Don’t Delay, there are important takeaways for firms required to go live in April 2020.
Securities Finance Monitor: What should reporting firms know first about the Guidelines
Catherine Talks: The most important change is the LEI statement letter, exempting firms from reporting LEIs for third country counterparties for another 12 months. Market participants have been very concerned about this given that the LEI has been a mandatory field in SFTR reporting. There are over 1.5 million LEIs already issued, but many countries have no legal obligation for it yet. Where there is an issuer with no LEI, there would be no way to fill in the SFTR field. ESMA took the matter seriously and have amended the validation rules accordingly, now when the jurisdiction of issuer field is a third country then the LEI of issuer does not have to completed for one year. This is a considerable relaxation of the rules and a benefit to the market.
Next, in addressing the substantial feedback they received, ESMA has updated important details on how reporting will actually work. Market participants should read the final report and the Guidelines that have been issued. The guidelines really act as a how-to for reporting purposes. The reporting requirements have been clarified and some new items have emerged, for example, an important change is the sequencing logic of acceptable reports. When submitting a cancellation or modification, these no longer act like reset messages. Instead, firms need to be aware of the previous submitted message and apply those rules for the next acceptable reports. An example of this is a correction message after a termination, the termination will persist rather than the “correction” so future events will be limited to those acceptable under the terminated status. Also, there is a whole new table that defines what event date means to reporting which varies across reports.
Another clarification is that if nothing is changing in the trade, firms should send only one report that contains all the changes during the day. Regulators do not want to see reporting with no new information. Whilst this was indicated in the official journal it has been really explicitly described in the guidelines.
SFM: Are the Guidelines consistent with EMIR REFIT and MiFID II, or do they represent large new workstreams for the industry?
CT: The guidelines have been kept in line with EMIR. For example, some of the questions that were raised in the final report asked that if the trade is an error by accident can it be cancelled? ESMA responded that that would not be in line with EMIR. ESMA is trying to keep consistency to not make SFTR overly burdensome.
SFM: The final report has new details on included and excluded transactions types. Has too much been added or taken away?
CT: ESMA has gone through the consultation process and discussion with the industry. The purpose of SFTR is to gain insight on avoiding a future financial collapse, and leads to much greater clarity on marketplace activity. The final report provides their explanation of required products by type and their decision to include or not in light of the regulation’s objective. Every market participant is going to have their own view depending on how they are impacted. One sector that will find a change will be AIFM’s who will have to report even if they are established outside of the EU but are authorized under the passporting regime. ESMA have stipulated where the allocation of responsibility is not applicable to the AIFM, then the responsibility to report to a TR remains with the fund. It is also implied that a Non EEA AIF may become reportable when managed by an EEA AIFM.
SFM: Data availability is a big concern. Have the new documents helped, hurt or kept the status quo?
CT: ESMA hasn’t changed the data requirements – we are still looking at the same fields and the same XML structure that was released in December 2019. There has been a lot of concern in the industry around reference data, for example data from credit rating agencies. Where data is extracted, it should be at the issuance level and the issuer level depending on the product type. ESMA has provided their clarification and everyone is working now to secure the required reference data. As far as helping, hurting or keeping the status quo, this is the latter regarding this particular subject. It’s still a lot of work.
SFM: When to report a CCP-cleared SFT seems confusing. Can you clarify?
CT: When you transact, you know if you are going to be clearing or not because you indicate the clearing in that report. Or if you decide to give up a trade that is already executed, you provide that information to a CCP through novation. The thing that changes when trading against a CCP is that you no longer have the bilateral counterparty. When trading with a CCP a firm can send a Transaction level message using action type “position component” and then report at Positional level for that record, in addition CCP cleared trades require an additional “margin” report to be sent. It takes a little time to work through but all of these reporting steps have been shown in the Guidelines paper.
SFM: Getting back to the LEI delay for third country counterparties, how much does this matter?
CT: The LEI delay is likely to change a few things, in particular the validation rules that looks to the issuer country code. The validations are really important, they describe what is reported and the relationship between fields and data sets. It is likely that ESMA will look to trends in the reported data over this year and may change the rules to improve data quality. This could ultimately make the rules stricter or looser in the future.
Changes to the validation rules have an impact on reporting requirements. The validation table details the inputs per product, per action type and per level, dictating the value required for each field and the interdependencies between fields. In an XSD (the schema for an XML file) you may need an LEI with a 20 character numeric but it is the validation table that confirms the status of the LEI that would be accepted. There are also requirements that one field must be completed (or left blank) based on another field being entered with specific values.
Looking broadly forward, we expect the LEI delay to be temporary as more countries without an LEI issuer solve that problem. Already, the Trade Repository statistics are in line with requirements from the Financial Stability Board. This means that with an expansion of LEIs, SFTR and other rules like it could expand globally.
SFM: What’s next for SFTR?
CT: At this point, we now have all of the documents that firms are required to report. We have the authorized version of the XML, and we have the how-to of reporting in the Guidelines with XML examples and descriptions. We also have the final report, which is the response from the last consultation paper, and the final validation table. There are some complex topics covered in these documents; some firms have contacted us to discuss where they feel there may be some conflicting requirements.
With a 13 April 2020 go-live, this does not leave firms much time before they are required to start reporting. It’s been said before but I have to say it again: don’t delay on SFTR.
Links to the latest SFTR documents can be found at the ESMA website:
Catherine Talks is a product manager at UnaVista, the London Stock Exchange’s award-winning regulatory reporting solution. Catherine’s current responsibilities are focused on the product development of the SFTR Repository, engaging with clients and regulators and go-to-market planning. Catherine has previously worked on various UnaVista regulatory platforms including the MiFIR transaction reporting platform. Prior to her role at UnaVista in 2014, Catherine held roles in both buy- and sell-side firms focused on derivative products.