SFTR compliance confidence could be too high – Luxoft

SFTR compliance confidence could be too high – Luxoft

The level of confidence among banks regarding Securities Financing Transactions Regulation (SFTR) compliance might be too high, according to IT company Luxoft.

The firm polled 331 UK-based senior compliance professionals responsible for implementing SFTR at a range of investment banks, both UK and international.

Europe's sec finance reporting rules, set to enter into force in April 2020, will require firms to submit details of their stock loan, repo and margin lending transactions to a trade repository.

Virtually all interviewees in the Luxoft poll said they were “confident” or “very confident” that their firm would comply by the deadline.

However, experts at the firm reckon there are several reasons why the level of confidence among banks regarding compliance might be too high.

"For one thing, banks must manage their other priorities, such as Mifid II and Brexit, while also dealing with SFTR," Luxoft's report states.

Over three quarters, 76%, of those polled said Brexit constraints are increasing the reporting burden of SFTR while 72% said coping with Brexit technology migrations has meant there are fewer compliance resources available to deal with regulations overall.

Meanwhile, although preparations for EMIR will help, fundamentally, the securities finance rules present a different type of challenge.

The study added: “While EMIR regulation deals with over-the- counter derivatives, SFTR relates to repos, securities and commodities, lending and borrowing, buy-backs, sellbacks, total returns, and margin lending.

"Accordingly, the ability to capture and process data for one type of transaction does not automatically mean that banks can do the same for others."

Furthermore, as Luxoft notes, EU branches of non-EU entities must still report to an approved EU trade repository, and all counterparties must submit reports (even those based outside the European Economic Area).

"While EMIR relates to Europe and Dodd- Frank to the US, SFTR is a global regulation - a first for the transaction-reporting world," the report continues.

Speaking in Toronto at May, the regulatory chief at a US bank said SFTR will lead to a deluge of data which regulators will struggle to cope with.

Europe’s securities watchdog Esma has opened a public consultation on draft guidelines on how to report securities finance trades.

Respondents to Luxoft's poll noted benefits that SFTR can bring – including streamlining in-house processes (62%), improving the use and risk management of collateral (58%), and boosting the transparency of funding (57%).

However, nearly half, 47%, admitted that their trading infrastructure was unable to cope with the generation of the Legal Entity Identifiers (LEIs) and Unique Transaction Identifiers (UTIs) that SFTR requires.