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Aug 23, 2019

A funny thing happened on the way to the fora (and what to focus on) …

23rd August 2019

Business days to SFTR

Whilst sitting through one of the many industry forums the other day one of the participants used the pluralised term for forum – ‘fora’.  Along with the need to brush up on my Latin, this got me thinking about the effort in the industry to review and assess the impacts that SFTR will have on firms and the need to adapt operating models – their processes, systems and behaviour, in order to deliver transaction reports to the trade repository accurately and on time, whilst dealing with exceptions and breaks.  Here, I’ll summarise this effort and give an overview of what firms should be doing to deal with issues going forward.

As the majority of firms so far have chosen the joint Pirum & IHS Markit SFTR solution, their attention has now moved to what they need to do to manage their SFTR reporting when they go live.  We’ve been discussing this extensively with firms and advising what they need to do in the new regulatory transparent world.

Let’s start with an overview.  With apologies to Sondheim and Howerd*.

The prologue

ESMA has published their level three consultation, with 85 questions over 178 pages and held their own fora on 15th & 16th July to discuss this generally with the market and the industry bodies.  The guidance also provides some useful reporting examples that can be used to check both the reporting submission but also help to clarify issues.  The publicly available responses are now on their website and provides some insight into what the regulators and respondents are thinking.

At Pirum & IHS Markit we have been actively feeding into this consultation, along with the industry – the feedback reflects many of the challenges that organisations see, and clearly there will be on-going discussions on how to deal with these.

Some significant issues to monitor are around: Cashpool treatment for stock loan trades, lifecycle event report timing, LEI availability of security issuers, VM treatment for repos. 

Clearly, clarification of these issues will benefit the industry, however the expected timeline – Q4 2019 for this to be published will then leave only a quarter before the first wave of firms are due to go live, so not long!  For those firms using our SFTR solution, we’ll be able to provide an impact analysis of any last-minute changes and prioritise these with clients for delivery and testing, so if you haven’t decided on a solution yet, it’s time to get involved. 

 Titter ye not

Whilst the discussions continue, we’re actively helping firms clean up their books and automate processes through our reconciliation services and post trade automation.  With an adjusted average daily trade rec of 6.3m trades, we saw a daily average of 276k unpaired trades and 1.4m paired trades with breaks across our client base**.  A review of these has highlighted issues with data quality and booking practices that can be remediated prior to the SFTR go-live date.

Below we show the top 10 breaks per product and discuss the issues around their cause and how these can be prevented.  Our analysis shows that there is a significant amount of automation available to help prevent these issues, however the impact on firms BAU operating model ranges from low to high complexity.

Top 10 breaks reasons for SBL & Repo mapped against the ability to automate and impact on operating model

As part of our service, we provide firms with statistics and benchmarking via our GUI to help firms prioritise their account clean up.  Additionally, firms can use our SFTR UAT environment, available for testing, to review the additional SFTR fields for data quality when they are able to submit those, before moving on to pre-production testing later in the year.  When firms are in pre-production, they will be able to review breaks to resolve root causes of issues on these additional data fields and Pirum are working closely with firms to help them identify issues early and prioritise these. 

On the next page we review some of the specific issues that firms face and give some practical examples of what should be done to help prevent these.  We recommend looking at your current breaks and processes and focusing on those that will prevent effective sharing of UTIs and will impact life-cycle event reporting. 

This is particularly important for agent lender disclosure, for both SBL and Repo, and firms should pay attention to where they are currently matching overall quantities on a stock, but the individual trades or shapes are not matched either at the start of the trade cycle, as a result of re-allocations by the agent lender, or due to returns being taken from different shapes, here we look at some of the practical ways of managing these issues. 

From average six-monthly trade reconciliation data, does not include unreconciled data.  Indicative for information purposes only.  Paired trade breaks for unpaired trades from total to be reconciled.  Top 10 breaks for repo and SBL products mapped to client reconciliation requirements and % breaks from total paired trades to be reconciled

Main causes of pairing and matching issues in current BAU processes

Nay nay and thrice nay

Firms rightly have focused on regulatory compliance – there is an imperative in getting over the line and making sure that they are accurately reporting their books and records when the applicable go-live date occurs.  However, there is a great deal of concern around what firms need to do daily in order to manage the new reporting burden and are reviewing their operating processes, automation, data quality and resources to support this.

It’s not all bad, painful maybe, but should lead to better quality data and improved, automated processes in the long term.  That’s all well and good, but how do you get the balance between regulatory compliance and the nirvana operating model that the industry is looking for?

Whilst some firms are advanced in their operating model changes, many are yet to start.  We’re now supporting UAT testing for firms, and they have an opportunity to look at many of these issues in practice – and as firms gather momentum, they will be able to review these issues in a pre-production environment. 

From the reviews so far, there are several themes that reoccur which include;

Data quality – reviewing available data sources for both accuracy and process impact.  Firms should also look at the BAU processes that update data.  For example: when setting up new counterparts, funds within fund agreements and product static along with the controls and the timing around this to ensure consistency in the multiple use of the same LEI for reporting.  Clearly prioritisation around data fields needs to be focused on given the breadth of this within the reporting requirement, and those causing pairing issues, large number of breaks or processing issues. 

Processes – many processes need to be reviewed, not least the UTI generation and sharing – the process of agreeing who will generate the UTI, or if the waterfall will be followed.  In addition, clearly defined roles and responsibilities should be laid out for exception management – for both report enrichment, creation and submission, along with breaks / UTI reconciliation and resolution.

Workflow – managing exceptions within your organisation, along with counterparts and the timing of resolution and escalation will be critical.  Controls, and again clearly defined roles and responsibilities around this will be needed, and how these overlap with existing processes needs to be carefully aligned.  Tools to help manage the information flow within your firm and between counterparts should be carefully reviewed, particularly where new processes and exceptions management overlaps with existing BAU process and roles and responsibilities, so the workflow, responsibilities, timings and controls will be critical in managing this going forward and requires careful review.

A big focus for firms is managing UTI sharing.  Our SFTR solution will significantly increase the level of UTI sharing compared to other regulations – across SBL, repo, multiple MTF platform or bilaterally, and will help with managing UTI sharing on the back of life-cycle events.  Where one side of the trade is not on the platform, we can either receive or deliver UTIs between counterparts.  As no firm will be trading on a single MTF and will be trading and managing life-cycle events with multiple bilateral counterparts across their SFT product range, this will be a significant benefit when sharing and consolidating your UTIs across your book for reporting.   Understanding what your counterparts will be doing around this issue and use of vendors will be critical.  Using the industry questionnaire and IHS Market’s Outreach 360 tool to gather and distribute your responses will help to manage this.

Clearly, firms need to efficiently manage data and breaks resolution along with the TR reporting submission and management.  Our SFTR solution allows firms to manage this workflow and is integrated in to both the IHS Markit TR report submission process and the Pirum post trade processes for economic, risk management and process automation.  This provides a comprehensive tool to manage exceptions and increase the efficiency of SFTR report management through benchmarking and MIS.  We can efficiently allocate breaks both internally within your organisation (so the right person or team will have a view of any issues and resolve these as soon as possible) or allocate issues to your counterpart for them to review, with communication between you captured and audited.  Using this service will take advantage of the connectively that we have with firms who will be using our SFTR service, in order to effectively communicate and resolve issues. 

The epilogue!

Cicero said Cuiusvis hominis est errare, nullius nisi insipientis in errore perseverare.

To that end reviewing your current issues, many of which we’ve mapped as a strawman for firms to review and look at how they need to adapt their process and manage controls going forward.  We will be discussing this in more detail in the coming weeks with our clients. 

To find out more, please contact us, or meet us at the upcoming events we’ll be hosting or attending over the coming weeks.

Upcoming events:

Our next DPG will be in September.

Pirum will be holding a breakfast briefing with DTCC and IHS Markit on 11th September for beneficial owners and will be at the Finadium conference on 24th September in Paris, IMN conference on 25/26th September in London and ISLA post trade forum on 1st October in London.

Plus watch out for other events….

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* Stephen Sondheim ‘A funny thing happened on the way to the forum’ and Frankie Howerd ‘Up Pompeii’

** Average daily volume from Jan- Jun 2019 reconciled via Pirum Systems, adjusted for ALD positions