In the last lifecycle blog we looked at how the returns process affects pairing and matching for SFTR reporting. Firms are now starting to look at the SFTR matching field breaks, and a big focus is around prices, value and currency issues. In this blog, Simon Davies at Pirum gives an overview of the impact of value and mark to markets.

Simon: Once firms report their transaction to the Trade Repository (TR) the TR will then pair and reconcile the data that they receive if both sides to the trade are reporting. Prices, valuations, and currencies are used in 13 of the fields that are reconciled, so having the same data as your counterpart will reduce the amount of field level breaks that you will get. However, given the very low tolerances the reconciliation involves, it is almost impossible that firms will have the same data over the trade lifecycle.

This is not unexpected given that firms use many different sources of data, from exchanges, custodian and data vendors along with the use of blended prices, timing, FX rates and inconsistencies in the taxonomy used – particularly around the use of close prices and discrepancies between Bid / Offer / Mid values. All the above contribute to differences in the prices a firm uses for securities that are then used for valuation calculations for both trade and collateral.

The problem is more problematic due to the challenge of making changes to the sources of data a firm uses given the extensive system integration within organisations. Whilst prices are used in a firm’s SFT processes they are also often used for other products and for internal PnL and risk management. Therefore, it is not easy to change this for a specific use case without having a broader impact. Coupled with this challenge, trying to get a whole industry to change to standard prices will be both time consuming and costly.

At the trade outset, firms agree the price, currency and FX rates used, but these quickly get out of line through mark to market processes using internal pricing sources. Prices can continue to be agreed throughout the trade lifecycle but given length of time trades are open and the volumes involved this requires automation and controls to be in place.

At Pirum, our marks functionality allows counterparts to automatically agree and control the value that they mark a trade to and identify and resolve any exceptions. This benefits not only profitability, by minimising PnL adjustments, but exposure management and risk management processes. Of course, it will also minimise matching field breaks for SFTR reporting.

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