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Dec 4, 2019

The ghosts of SFTR – a seasonal fable…

4th December 2019

As we near the end of the year and we focus on the festivities to come, it reminded us of the story of Scrooges visit from Marley and friends – the ghosts of Past, Present and Future.

A fable of ghosts – over the course of three nights Scrooge was visited by three ghosts; 

The Past – As a young fellow, Scrooge was jolly and enjoyed a happy life – The Ghost of Christmas Past, reminded him of his happy childhood and how things used to be.  This reminds us of the times before regulatory pressures set in within the securities finance industry. 

The Present – The Ghost of Christmas Present reminded Scrooge how things have changed and weighed down by work and hardship how he had become withdrawn and miserly.  This resonates due to the onset of regulation we’re seeing more pressure on our industry and effort put into compliance and its impacts.

The Future – The Ghost of Christmas Future shows a long gone and forgotten Scrooge, pillared by those he knew, happy that he was gone.  This foresees the future and how things could be unless he changes his ways.  This reminds us of the crossroads we’re at within the industry with predictions of challenges and opportunities that could potentially happen.

So, what lies ahead? 

Here we are – with five months to go, or 90 business days before the first phase of SFTR reporting starts in April 2020.  In October ESMA published the new version of the validation rules with some issues that need to be addressed, but otherwise more or less in line with expectations, with a new version anticipated in the new year.  Now we wait on ESMAs guidance notes to be published – expected as an early Christmas present in late Q4, when some fundamental issues should be clarified.

We’ve written before about how the industry is preparing for the future state, and the opportunities that better data and more automation will provide, but clearly there will be challenges along the way.

Along with our SFTR partners at IHS Markit, we’re now well advanced in helping firms prepare for the go-live date, and many firms are progressing well with UAT.  Some are moving into pre-production testing and importantly bilaterally comparing SFTR data – enabling them to see how the UTI sharing process will work in practice and help with clearing up their data quality issues.  We’re also working with firms on what the impacts will be on their operating model – this is currently focused on identifying processes that will cause pairing issues at the Trade Repository and how best to deal with these and automate where possible.  In our last blog, we published details of the breaks we’re seeing today in the industry and what can be done to minimise these in the run up to go-live.  Now we’re seeing SFTR data reconciling we’re able to help firms get visibility on what is causing those breaks whilst also implementing new processes around UTI and agent allocation sharing. 

Some common themes we’re seeing include;

Validation challenges – aligning to and monitoring the evolving ESMA validation requirements and ensuring that you are inline.

Data quality challenges – the most common issues we’re seeing now are around LEIs – where firms use different sources, consistency in execution time stamp caused by time zone capture and haircuts.

Matching tolerances – not surprisingly this is most common where firms have differences in decimal places for prices when not using a marks reconciliation service and execution timestamp.  Additionally, where firms haven’t got automated returns processing, we see up /down UTI level breaks where the trade paired originally then has an unpaired trade when a full return is processed and the counterparts process this out of different UTIs or quantity up/down between two UTIs for a partial return.

Now to the new year

As firms enter and ramp up their SFTR testing and move towards a pre-production environment, we’ll be co-ordinating testing between counterparts to maximise this across the industry, increasing the use-cases tested and helping to identify issues and benchmarking them to see where they sit in comparison to their peers.

We’ve also been working with clients on what additional support they need and enhancements to our service offering, leading to the launch of UTI Connect – which adopts the industry best practice guidelines in order to support sharing information with firms who are not utilising the SFTR solution.

Clearly, for those firms that are at an early stage of their preparations and going live in April, or in a later phase but need to be ready to support their counterparts – particularly asset managers, time is of the essence.  Although you have more than the one-night Scrooge had, we’re here to help and support you.  The work that we’ve been doing can be leveraged by firms, particularly asset managers who come into later phases.  Depending where you are here is a check list to work through:

Now with 14 of the top 15 brokers, 13 of the top 15 lenders and an estimated 80% of market volume requiring a UTI going through our SFTR solution, including asset managers trades, we have unparalleled connectivity.

Enough to make even Scrooge happy!

To find out more, contact us as SFTR@pirum.com

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