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May 29, 2019

#1: SFTR blog ‘Testing,Testing, 1,2,3…’

29th May 2019

Simon Davies

As a new starter to Pirum, I’ve been asked a lot of questions over the last few weeks both within our firm and from our clients, some of the bigger picture ones have included:

How ready are we for go live?  How ready is the market for SFTR?  Everyone is talking about testing – why?

In a new series of market updates, we’ll be looking at some of the issues that the industry is facing relating to regulation and beyond, with the aim of providing some useful insights to help firms as they adapt to the challenges ahead. 

Firstly, an SFTR update. 

The EU parliament ratified the RTS on 22nd March 2019, ESMA also announced that they will be providing level three guidance to the industry.  This has now been published as of the 27th May, and following an industry consultation period, the final level three guidance is expecting to be published in Q4 2019.  The first phase of go-live is due to start on 11th April 2020, leaving 318 days to go!

Our readiness

It’s impressive the amount of work and effort that Pirum and our SFTR partners at IHS Markit have invested in reporting preparation so far.  As a new member of staff, I’ve got a unique perspective on how the securities finance industry has been preparing for what amounts to the largest regulatory change it has seen, and firms large and small have been diligently preparing for this for a while now.

Since the regulation was ratified by the EU parliament, we’ve seen an increase in activity from firms preparing for SFTR compliance, as well as new clients signing up for our regulatory reporting services.  In addition, existing clients are ramping up their efforts, particularly around how they are going to adapt their operating model in order to maximize the pairing and matching rates at go-live. 

As part of our SFTR Design Partnership Group (DPG), we have taken the time and effort to listen to what our clients need and working out how we can support them in their reporting solution.  Around 830 hours have been spent by the DPG, reviewing requirements and discussing how best to achieve these – along with the many hours by the industry bodies in defining best practices.  Naturally, this has taken time, as firms grapple with the requirements and gain a broader, more detailed understanding of what they need. 

This hasn’t delayed anything and has added enormous value to both our delivery programme and our clients.  Between Pirum and IHS Markit, we’ve dedicated over 30 resources to our joint programme and we’re now in the late phases of our project. Most importantly, we remain on track and continue to progress well. 

What this means in practice is that we have firms on-boarding and integrating file feeds to our service well ahead of the go-live date for reporting, and ahead of our pre-production testing planned to start in Q3 of this year. 

We actively share and review our progress and pipeline with the DPG and our clients, as part of our on-going communication with the market and we now have 48 firms committed to using our solution, so let us know if you’d like more details. 

Is the industry ready? 

No, not yet! I don’t think anyone would be surprised by that.    

Firstly, firms are working though some complicated issues at an industry level, adopting the emerging industry best practices and along with dealing with these changes at a reporting level, firms are having to adapt their operating models.

Secondly, we need to wait until the level 3 regulatory guidance is published to determine how the regulators are looking to clarify some of the outstanding points around reporting.  The industry has fed into this through the industry bodies, and there will be a period of consultancy following the publication, with current expectation this will be finalized in Q4 this year.  ESMA published their (draft level 3) consultation on guidelines for reporting under articles 4 & 12 SFTR on Monday and we have shared our initial thoughts on our LinkedIn page. You can find the link to the consultation papers below.

Thirdly, there is no requirement to report yet, and there are no authorized TRs yet to send reports to.  Rightly, the industry is taking full advantage of the timeline afforded to them by the regulators to prepare for the go-live date. 

Importantly, we’ve seen firms engage across their business units and reg reporting teams to work on their solution designs and through our DPG we’ve seen an impressive level of engagement to deal with the challenges the regulation creates.  The industry has learnt from issues in the past, and whilst firms are not ready yet, we’ve seen an increase in their activity in preparing for the regulation since the RTS ratification took place.

Why is everyone talking about testing?

This stems from several factors.  Importantly, the industry has learnt from other reporting regime implementations, where there was little, if any testing taking place prior to go-live, and given the best practice development and the changes that will impact firms’ current processes, thorough testing is required.  It would also be fair to say that recent industry fines have helped sharpen the focus for firms on getting their SFTR reporting solution right! 

To that end, vendors, including ourselves, and TRs have been able to accelerate their sandbox environment availability and are able to use these to demonstrate capabilities, so naturally there has been an awareness of this in the industry, and certainly at an earlier stage in the development cycle than we have seen in other reporting regimes.  We’re no exception to this, and these environments help us demonstrate how our solution will work, and how firms can think about what their operating model will look like in production.

As firms move on from their solution design, vendor selection and progress with their implementation, the phases such as on-boarding and testing that seemed so distant last year, are now closer, so it is natural for firms to start to focus on these issues.  Whilst we have developed our own testing approach and we’re also supportive of the Delta Capita testing consortium, we are working with firms around how we support their testing strategies too. 

We’re now on-boarding and integrating firms to our reporting solution.  Currently we are in the throes of system integration testing (SIT) with several firms and many more will be joining as and when they are ready, with the aim of providing pre-production testing from Q3 and beyond.  This will give firms the opportunity to start to review root causes of issues and align their production processes and remediate data quality – we’ll talk more about this next time. 

If you would like to talk to us about our reporting solution and testing approach, please contact us for more details.

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In the next installment we’ll be looking at how to prepare for the challenges of implementing your reporting solution into a production environment and how we can support you