NTEX RCSI (Investment Services Compliance Officer) return on experience on the practical implementation of SFTR (Securities Financing Transaction Regulation) reporting within the Company
NATIXIS TRADEX SOLUTIONS (“NTEX”) is a financial markets specialist and an entity of Natixis Investment Managers. It is an outsourced intermediation service desk that works on behalf of clients in banking/insurance and asset management.
In addition to its activity, NTEX is also a key player (€11bn in securities lent/sold under repurchase (repo) agreements on average in 2020) in securities financing operations including securities lending (lending and repo transactions).
The Company uses this offer to optimize the income of client portfolios by lending their securities on markets while at the same time establishing an environment that is compatible with a Socially Responsible Investment (SRI) portfolio vision (see newsletter of 12/15/2020). The Company also uses a repo mechanism with several counterparties in order to develop portfolio performance under the conditions prescribed with its clients.
The European Union (EU) has developed the Securities Financing Transaction Regulation SFTR(1). SFTR reporting supplements the Transaction Reporting of the Market in Financial Instrument Regulation (MIFIR)(2) and the European Market Infrastructure Regulation EMIR(3). SFTR is intended to enhance the transparency of the securities financing markets. Prior to this, no reporting was conducted for Securities Financing Transaction (SFT) activity.
Sophie Gourlez, Natixis TradEx Solutions RCSI, shared her experience of the initiative with us.
SFTR reporting: an overview
SFTR reporting is a midpoint between MIFIR and EMIR Transaction Reporting. Its rollout has caused a great deal of anxiety.
Considering the issues faced by multiple asset management firms in achieving Transaction Reporting compliance in 2018, with its 65 data fields, SFTR is far more comprehensive (155 fields) and complex since it not only includes transaction data (including contractual information and reference data), but also collateral data (position valuation and margin calls) and its daily use the next day across the transaction lifecycle.
As is the case with EMIR, some data sent to the trade repository (96 fields) must be matched. Such data includes the following: execution timestamp, SFT type, trading venue, collateral type, main currency and collateral.
To achieve this, the trade repository matches the transactions issued by both parties using their Unique Transaction Identifier (UTI) code. Both counterparties share and insert the UTI in their statements. This UTI is then used by both parties throughout the transaction lifecycle to declare the various events of any Securities Financing Transaction (SFT) such as termination or subsequent changes.
The entry into force of the reporting obligation was gradual, based on counterparty categories:
July 13, 2020: Investment firms, credit institutions, central counterparties, clearing houses and central securities depositories;
October 12, 2020: Insurance companies, UCITS and AIF managers;
January 11, 2021: Non-financial counterparties.
NTEX project management
NTEX kick-started the project with all the standard components of such a regulatory initiative.
The Company leveraged the expertise of its businesses: compliance, front office, legal, IT, reference databases, middle office, sales, etc. NTEX had to decide on and roll out organization with counterparties and service providers. In particular, this phase involved Ostrum AM and the trade repository even though all standards and organizational processes were not specifically identified. NTEX also incorporated various related group and cross-industry initiatives such as those led by the French Financial Markets Association (AMAFI).
With respect to NTEX, the main compliance phases of the new regulation were as follows:
Time for reviewing and interpreting the regulation;
Participation in group and cross-industry initiatives;
Efforts to structure the organizational target, the choice of trade repository, the scope and the schedule;
Rollout of IT-related developments and solutions;
Development of client awareness as regards the new regulation;
Proposal of a reporting service;
Contractual arrangements with service providers and clients.
Further questions were raised in relation to other forms of regulatory reporting once NTEX had defined the scope of reporting transactions as certain counterparties for these transactions suggested reporting on behalf of their co-contracting parties. However, by factoring in all counterparties’ lack of a clear regulatory position coupled with scope and second-level control issues, NTEX concluded that it would be simpler, more exhaustive and safer to produce this reporting itself.
Driven by the same goal of performance and control, the Company also concluded that it needed to complete its offer with an additional reporting service for its own clients who also need to report these transactions.
The regulation requires asset management firms, insurance companies and credit institutions to establish this new reporting. Nevertheless, such organizations do not necessarily have the expertise and resources required to produce their own reporting.
We are very pleased with the success of the initiative. We are also pleased that NTEX succeeded in delivering its own reporting and that of its clients on schedule, in line with the regulation, following a year and a half of related work.
Main issues encountered: focus on UTI exchange format
Aside from the regulation, which was not set in stone during the project management phase, the main challenge centered on communication with our counterparties and the definition of a UTI exchange format.
Each counterparty may choose a different format for communicating their UTI:
Vocally when orders are placed;
Via technology suppliers;
Via its Middle Office post trade.
During its project, NTEX interviewed the counterparties to find out their preferred UTI exchange format in order to minimize manual operations and the risk of errors.
Through the surveys, NTEX learned that some counterparties needed time to choose a UTI exchange format. The surveys also showed that others changed their opinion during the project while another group of counterparties had a different approach depending on the execution channel and the SFT type (repo or lending/borrowing transactions). This caused much uncertainty in terms of automatically and systematically retrieving the UTI format.
As a result and in light of the various feedback received from its counterparties, NTEX decided to use technology suppliers such as Equilend and IHS Markit. To this end, NTEX succeeded in automatically exchanging the largest possible number of UTIs.
All told, NTEX capitalizes on these technology suppliers to automatically exchange most UTIs. Very few UTIs are exchanged vocally when orders are placed. This does, however, incur considerable additional costs.
What are the next steps?
To date and in consideration of first- and second-level controls, NTEX’s issued SFTR reporting undergoes is well implemented and data quality is satisfactory despite the recent rollout.
NTEX will continue to perform controls on its SFTR reporting and will follow up on proposed changes to the regulation. The latter includes the mandatory transmission of Legal Entity Identifiers (LEIs) from issuers of securities lent or received as collateral, whether European or international. Indeed, the trade repository could reject reporting in the absence of such information. There are cases involving American and Asian securities issuers who do not have a LEI.
Lastly, NTEX is planning to analyze its pairing and matching levels with counterparties with regard to its trade repository. The Company will seek to compare levels with industry-wide practices, in an effort to determine the scope for improving data quality.
In other words, there is still much work to be done!
Head of Compliance, Internal Control and Risks
Natixis TradEx Solutions
(1) REGULATION (EU) 2015/2365 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of November 25, 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No. 648/2012
(2) REGULATION (EU) No. 600/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of May 15, 2014 on markets in financial instruments and amending Regulation (EU) No. 648/2012
(3) REGULATION (EU) No. 648/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of July 4, 2012 on OTC derivatives, central counterparties and trade repositories
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