Data, Oct 09, 2019

SFTR reporting: Identifying key challenges and how to solve them

Rob McPherson

While ESMA have tweaked SFTR reporting validation rules for non EU Legal Entity Identifiers (LEIs), the Data Quality challenges remain considerable.

With the first SFTR Reporting deadline approaching in April 2020 we examine the key challenges for the wide range of firms that must act to achieve compliance in a short timescale, as well as the solutions.

Many organisations will feel a sense of deja-vu having worked hard under the MiFID II and EMIR regimes, but the extra level of transparency and reporting on SFTs is even more taxing.  As a result, more creative and innovative solutions are needed.

In particular, the requirement to have Unique Transaction Identifiers (UTIs) attached to each trade to ensure matching creates data challenges and further demands on resources. The tolerances on reporting are minimal, resulting in a high risk of unmatched exceptions and this is exacerbated by the number of parties involved in a trade data flow.

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Key challenges

  • The data components that make up a SFT are spread across multiple systems, and to be compliant, new fields of data need to be generated, including UTIs to enable trade reconciliation;

  • There is a need to extract all elements of the lifecycle of a transaction to be able to meet reporting obligations;

  • The generation of UTIs will be a significant challenge, both in terms of the rules that define which party is responsible but also the changes to systems and processes to accommodate these;

  • There are elements of SFTs that have, until now, been something of a black box, such as prime brokerage. There will need to be a greater degree of conformity on data standards, and there is a question as to whether businesses are ready to implement this;

  • The Securities business is split across multiple silos – Securities Lending, Margin Lending & REPO and traditionally each “business” will have its own systems & data and reporting infrastructure;

  • As with MiFID and MiFID II, significant change is required in technology strategy to plan and coordinate changes to systems. There is a balance to be met with regards to compliance demands and minimising the impact and disruption on day-to-day business and workload.

It’s clear that SFTR reporting provides us with a daunting challenge and a robust strategy is required to ensure both technology and business process changes are carefully managed.

Firms should assess not only what changes they must make in the short term to enable compliance, but in the longer term to ensure they have a sustainable model to meet the ongoing demands of the regulation.

An immediate focus should centre on the data required to meet the transaction reporting demands. Where does this currently reside? Where are the gaps? What 3rd party data is required for enrichment?

Firms should then look at developing an effective strategy for the extraction, management and reporting of the data to the trade repository. A short-term view may be to leave things as-is and re-use existing systems and infrastructure as much as possible, but this may result in a lost opportunity to overhaul the underlying data architecture and centralise the reporting function.

Realistically, the upcoming deadlines and resource demands will result in many firms using a short-term approach, but as outlined below, this could evolve into the following phases:

Phase 1 – Meeting Initial Requirement

Firms will initially look to update and enrich existing systems and reporting infrastructure to address their data gaps while integrating 3rd party reference feeds. Initially, transaction reporting may be driven separately by each business line.

Phase 2 - Consolidation and Centralise model

By standardising the transaction booking process, firms can look to consolidate securities systems across business lines, reduce redundancy and simplify data flows. This then enables central management of data and reporting infrastructure to enable a single reporting channel, hugely simplifying the maintenance of the transaction reporting process.

Phase 3 - Future technology

A further benefit of implementing a centralised model is that it will enable easier adoption of upcoming technology advancements. This can provide better automation and efficiencies as well as a competitive edge.  
A common domain model (CDM) for the securities business is on the horizon, which will enable the use of distributed ledger technology (DLT), which in turn opens up the benefits of smart contracts and increased straight-through processing within the securities business. It’s vital that firms look ahead when planning their technology investment to enable alignment with upcoming developments.

In a nutshell

SFTR represents some immediate data challenges that will drive initial strategy and planning; however it’s important that the technology journey doesn’t end simply with initial SFTR compliance.

At Credera, we can work with you to plan and deliver on the technology challenges your organisation currently faces regarding SFTR compliance, while our SFTR Technology Strategy enables you to plan your technology investment now and in the future.

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How a data 'A Team' can help overcome systematic changes in banking

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