With recent finalisation of regulatory obligations, the time has finally come to take action. Like other comparable regulatory initiatives, firms need to start understanding which key business processes are most impacted across the transaction and process lifecycle, across front office, collateral management, operations and support functions. Because Securities Financing Transactions Regulation (SFTR) impacts so many different business and support functions and will impact some of the very same clients who have just gone through the MiFID II journey, timing will be key to ensure firms are meeting their regulatory deadlines while avoiding excessive commercial disruption.
To provide perspective on the scope of SFTR’s impact, we’ve summarised five key challenges impacting BAU processes which we’d recommend are addressed as part of your SFTR delivery programme:
- Booking Timeliness: Transactions are often booked hours after the trade is agreed, however SFTR will mandate matching timestamps with sufficient time for middle office teams to reconcile data tables requiring firms to standardise end-to-end booking processes
- Non-standard Booking Processes: Manual bookings and non-standard bookings (i.e. booking a security financing transaction as one trade) booked in certain ways due to legacy reasons / industry norms or to accommodate internal processes will likely need to change (as we saw under MIFID II). Firms should take note of these scenarios and prioritise making changes in future state operating model design
- Trade Enrichment (Unique Transaction Identifier generation (UTI)): Firms will need to establish UTI generation processes which ensure agreement from counterparties and create resolution processes when breaks are identified at matching and reconciliation. Firms will need to take special care when interacting with counterparties who do not adhere to commonly used UTI generation tools
- Collateral Optimisation and Reuse: Collateral will need to be tagged at an ISIN level which results in a fundamental change to the collateral reuse process specific to how collateral is inventoried, prioritised and recycled. Smarter data mapping and logic will be required, underpinned by a collateral reuse policy with appropriate governance and controls ensuring fair and consistent outcomes
- Electronification: Matching, execution and reporting platform selection will be dependent on liquidity and counterparty preferences, however matching platforms are not a golden ticket. Access to different platforms for Repurchase Agreements and Securities Lending may be needed in addition to other market participants / intermediaries (i.e Inter Dealer Brokers, Custodians, Clearinghouses, etc.) who will look to leverage the power of data to drive greater interest. Firms will need to re-think current architecture with an eye on what the future operating model will need to look like. Note: this has a particular impact for agent lenders who may look to set-up venues or align with a preferential venue(s) to concentrate liquidity.
Call to Action
At the very least, we recommend mobilising a programme to assess operating model impacts in addition to engaging priority vendor platforms to agree how best they can support delivery. Larger, more complex firms should be focused on finalising requirements and rapidly moving to integration discussions with agreed vendors while benchmarking key design decisions against industry peers.