Like many other third-party lending agents with SFTR reporting obligations, core to the challenge of implementing this new regulation was managing the large number of data points (approximately 150) required by regulators, many with a reference data requirement. Prior to SFTR, client reporting included around 20 data points, making the shift monumental. Pairing and matching and ensuring SFTR reporting met XML and ISO 20022 format added to this. And all of this was exacerbated by an industry with little experience with previous reporting regulations. Knowing this, a third-party lending agent turned to us and Pirum Solutions to support its implementation project.
Selecting a vendor
As a securities lending specialist without other business line regulatory reporting requirements, our client knew that an internal development solution would not be cost-effective nor sufficiently comprehensive. With an existing relationship with us and Pirum for data processing and benchmarking, and the confidence that they would develop a full solution following their announcement of such in 2017, they were the lending agent’s first choice of partner. In addition, we had extensive previous experience in creating reporting solutions to meet their needs, increasing the likelihood of success.
So much to do… where to start?
SFTR wasn’t being built on existing regulatory reporting processes and it quickly became clear that to build a product, client insight was a necessity. The lending agent was one of our / Pirum’s first clients to join their Design Partnership Group in which market participants worked together to better understand what, as an industry, was needed, focusing efforts and ensuring the ultimate product covered all industry use cases. Over time, this was expanded to bring wider industry participation, with firms collectively working together to formulate solutions to the issues being faced. Managed by us and in participation with other industry groups such as International Securities Lending Association (ISLA), ICMA ERCC, AMAFI, AFME, BVI, AIMA and the Trade Repositories, we provided knowledge and expertise as well as administrative and logistics support that facilitated the group’s work and ensured effective communication and information sharing.
For an industry with little experience in major regulatory change and none in reporting, the operational impact was substantial. Technology, operations, client, and product teams all needed to work together to bring our client’s systems and processes to a point they could manage SFTR requirements. For our client this meant approximately 10% of the firm’s workforce was actively involved in some way, representing a significant investment.
The consideration required for data provision issues was the most significant challenge. Reconciliation was not new, but the sheer scope of SFTR requirements made this challenging. Our client worked with its counterparties, with our support, to set up and manage static data to ensure reconciliation and high levels of matching and pairing. Included was agreeing on how Unique Trade Identifiers (UTIs) would be generated, and the process for sharing of Legal Entity Identifiers (LEIs). Ultimately, much of the analysis done at an industry level, facilitated by us and industry associations was designed to agree consistency across data points and establish best practice, without which implementation would likely have been impossible or very poor.
The Design Partnership Group was initially convened in 2017, with significant work being done prior to 2020’s planned implementation date. With lessons learnt from previous reporting requirements, our client, along with other market participants, had started testing at the end of 2019.
With SFTR implementation originally scheduled for April 2020, the pandemic and the resulting need to completely change working processes created a new set of obstacles. Accepting the impact, regulators pushed Phase 1 go-live to July, reducing some of the pressure but not the challenges that came with moving to an entirely virtual environment. Cross-industry working groups moved to online meetings while testing and data uploads were managed remotely. Overall, while challenging, this was well managed.
In addition, with Brexit looming, market participants needed to take the impact of this into account. On 1 January 2021, having already gone live with reporting to EU Trade Repositories, UK clients now needed to shift their reporting to the UK. Our early preparations for Brexit paid off, with a seamless process for redirecting transactions to the appropriate TR.
Successful go live
For our client, Day 1 expectations were high. Gratifyingly, it was very successful with a high percentage of matching fields. And longer term, where there are field breaks, these are being resolved on an ongoing basis.
Key to success was client satisfaction. The lending agent, which does not need to report for itself but rather on behalf of its clients, ensuring that the clients received a product that met regulatory requirements as well as their own, was central to its planning. “We are extremely proud that we’ve had no issues with clients as a result of going live with SFTR. This, more than anything, is a testament to the success of our implementation process and the work we’ve done with IHS Markit (now, S&P Global Market Intelligence Cappitech), Pirum and the wider industry as a whole,” enthuses the lending agent’s Managing Director Product Development. In addition, our client’s counterparties, who need to report trades from their side, have remained consistent, experiencing no significant issues in their dealings with our client.