SFTR – the need for accelerated change


Over recent months as some large regulatory deadlines have been met, one of the ‘long grass’ regulations has come into sharper focus given the intensive efforts that will be required to meet the deadline for compliance; ESMA’s Securities Finance Transaction Reporting (SFTR). The securities financing world is no stranger to directive and regulatory driven change; over the last few years, the likes of MiFID, Basel, ESMA Short Selling, Agency Lending Disclosure, FATCA and Dodd-Frank all having some level of impact. However, SFTR is commonly recognised as a ‘game changer’ for the industry, due to its impact on virtually every aspect of the trade lifecycle. Combined with huge data challenges (where a lot of focus has rightly been), potentially new technologies (or at a minimum new functionality using existing technologies), new booking models, new processes, new controls and a lexicon of new terminology, the term ‘game changer’ is a fitting description.

Technology alone will not deliver compliance

As this sector of the industry has already acknowledged having the right level of change management focus is going to be key. However, understating how new technology, services, client exceptions, deadlines, controls and procedures, etc will all work in the new environment will be a significant undertaking. The delivery approach that firms take in dealing with the challenge of this enormous regulation will have a huge bearing on the outcome.

What needs to be clearly recognised is that this is a regulatory project with a large technology component, which combined with the scale of the data requirements, makes this a very significant challenge in the time available. However, there are a number of other elements that also need to be considered. Having been very closely involved with the delivery of timely confirmations for equity derivatives under EMIR, we know that successfully adopting and embedding the changes into the day-to-day processing will be just as important as the technology deliverables.

Leveraging the opportunities

Whilst a lot of time and effort will be required to make the required significant changes, in addition to achieving regulatory compliance, it should also be feasible to leverage a number of potential opportunities from the programme, and these benefits should not be underestimated. The sourcing of rich data sets into a single location will enable improved metrics and insights around risk and control. First mover engagement with clients around new services such as delegated reporting could also prove to offer a major competitive advantage.

But it does not stop there, in addition, there will be a number of lean opportunities within the trade lifecycle. For example, the current post trade world has a large number of duplicate or similar matching and reconciliation processes, such as: contract compare, agent bank, triparty and fees & billing. Given that SFTR will introduce yet another matching, reconciliation and exception management process on T+1, similar to contract compare (which is best practice and not a regulatory enforceable activity), there could be benefits in improved settlement rates, reduced exposure differences and reduced billing exceptions. However, this will only occur if the optimal lifecycle processes, platforms and people requirements to deliver a lean, non-duplicative solution are defined and implemented. These new processes could yield significant effort and cost savings, which could be reinvested in managing expected SFTR exceptions, thus negating the hiring of more staff – a key benefit in the cost-focussed world in which most banks now operate.

Is there a Plan B?

As in most major programmes that are designed to create wholesale change, it is often wise to have a ‘Plan B’ option. The worst-case scenario here is one where the technology solutions do not work as planned, or are not delivered in time to meet the regulatory requirements. In either of those scenarios, we must ask what is Plan B? Stop trading? This is not really a viable solution. Keep trading without complying? This is also not a realistic option either, as even though non-compliance will not actually affect the validity or enforceability of a transaction, it may lead to fines, public censure, temporary bans and withdrawal or suspension of authorisations and, at Member State discretion, criminal sanction. The change function of the bank must be on top of this and work with the Business, Technology, Legal, Compliance and Operations functions to define how the business can continue in a ‘worst case’ scenario.

Having a Plan B that supports the continuation of business in a worst case scenario, even if only at a minimum obligation level, should be considered, planned for, communicated and above all, have the ability to be enforced and delivered quickly.

Being compliant should be the minimum deliverable

There is no doubt that SFTR is going to be a very large undertaking, and given the expected compliance deadline it should already be a major programme of work for all affected parties. If not, then firms need to quickly ramp up their efforts, if they are to have any hope of achieving compliance and therefore be able to keep trading. However, simply achieving the requirements for compliance should be considered as only the ‘minimum viable product’.

The more astute firms should approach SFTR with a multi-pronged methodology. They should leverage the project to identify opportunities to create real ‘added value’ benefit for the organisation. To achieve this, they will need to ensure that all areas of the firm that are impacted are joined up and working cohesively together towards a common and well understood goal, with change management at the heart of the endeavour.

Now is not the time to think about taking your foot off the pedal for SFTR; firms should rather be accelerating in a planned way, and as quickly as possible!