With the proposed introduction of two new regulations, Securities Financing Transactions Regulation (SFTR) and Central Securities Depositories (CSDR), ESMA are demonstrating their desire to increase oversight over SFTs (Securities Financing Transactions) and putting huge emphasis on improving settlement efficiency and reducing fails.
But is this a case of ‘two for one’ or ‘mind the gap’?
Go-live dates for both SFTR and CSDR are likely to converge in September 2020. Both are governed by the same European body. Both require significant change to legacy systems, components and data stores. In our view, it’s clear that close interaction between CSDR and SFTR programmes is essential to cover all the requirements without wasting effort. If your firm is running SFTR and CSDR projects independently, we strongly advise you check the overlap to exploit the opportunities for and benefits of cross-collaboration.
At the heart of the synergies between SFTR and CSDR is the fact that successful implementation of a robust data management and storage capability will pay long-term dividends across both regulations:
- SFTR data requirements are numerous and have far reaching scope (across 153 reportable fields), ranging from counterparty, loan, collateral and margin to triparty and re-use information. Firms will need to be able to identify the different reporting requirements across Repo, buy / sell back and stock lending products. This seems a Herculean task, especially when this information may not currently be centrally stored, and may have to be gathered from multiple data sources and trading systems.
- CSDR requires market participants to determine the difference between varying types of financial instruments. For example, product level information must be populated on the outgoing settlement instruction sent to CSDs. This will specifically drive the fail applicability and accrual processes for CSD members. While the 1bp late settlement charge for liquid securities will apply to Repo transactions with a term length greater than 30 days, those Repos with a term length of less than 30 days will be out of scope. This will be a critical classification to get right in the post-CSDR landscape, since – if not done correctly – it could mean transactions are charged, even when not applicable.
The data management requirements for client information across CSDR and SFTR will also be important in the future settlement landscape.
- Client information will need to be centrally stored and agreed between participants as early as possible in the settlement and reporting chain. Matching or pre-matching of client data fields prior to intended settlement date will be hugely significant in ensuring accurate data is reported to NCAs as well as ensuring the outgoing settlement instruction has the correct client account information published on it.
Similarly, the use of UTIs (Unique Trade Identifiers) is not only a cornerstone of SFTR but also something firms should consider aligning to CSDR.
- The use of UTIs in CSDR applicable settlement flows could be leveraged to track, accrue and apply settlement charges back to underlying front office trading books and provides a single unique reference between market participants to use when discussing differences or disagreements in settlement fines and the attribution of buy-in costs and fault for fail.
To us, the case for looking at SFTR and CSDR in the round is compelling and we are running a series of 2019 briefing events for those with explicit SFTR or CSDR remits and Settlement responsibilities to explore the opportunities of alignment in more detail.
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Note: This opinion piece was first published by Catalyst prior to the Sionic merger