US securities finance operations and compliance managers had better brace themselves for a US version of Europe’s Securities Finance Transaction Regulation (SFTR), caution industry consultants and market practicioners.
So far, US post-trade operations and compliance managers have been spared from dealing with a US equivalent to the onerous SFTR. However, they shouldn’t be lulled into a false sense of comfort based on the limited scope of a new rule just released by the US Treasury’s Office of Financial Research (OFR). “The US OFR appears to be playing catch up with European regulators, but US securities finance professionals need to pay attention to whether the OFR decides to expand its requirements,” George Bollenbacher, director of fixed-income research for global consultancy TABB Group in New York tells FinOps Report (www.finopsinfo.com).
His viewpoint was shared by a dozen securities finance operations managers at US fund management firms, custodian banks and broker-dealers contacted by FinOps Report. “We are worried that down the road the US will not synchronize its data requirements with the Europe,” says one securities finance operations manager. Yet another says he is even more concerned that the US could mandate that market players submit the same exhausting number of data points as the SFTR for a far wider set of securities finance transactions.
The 26 data points mandated under the OFR’s rule are a drop in the bucket compared to the over 100 required under the SFTR by the pan-European securities watchdog European Securities and Market Authority (ESMA) for securities lending, repurchase agreements, buy/sell-back transactions and margin lending. What’s more, beginning in October, only one clearinghouse, the Depository Trust & Clearing Corp.’s subsidiary Fixed Income Clearing Corp. (FICC), will have to start submitting information on repo agreements it clears on behalf of its members. That is because the OFR wants data on only cleared repos and FICC is the only clearinghouse that meets the OFR’s threshold for having a daily average open total value of repo transactions of at least US$50 billion. The data, which identifies the counterparties, dollar amounts of the transactions and interest rates, will focus on outstanding general collateral trades, securities used to settle netted obligations and outstanding specific security trades. Variations of securities lending deals, repos call for the sale and later repurchase of a security at a higher price.
By addressing only cleared repos, the OFR’s rule resolves some of the key stumbling blocks financial firms are wrestling with in Europe, say securities finance experts. Under the SFTR, both counterparties of repurchase and other securities finance agreements have to report the same information on the exact same deal including not only basic details but also collateral use and reuse. That means tracking down and extracting information from multiple internal applications and third-party service providers in record time.
Reports must be submitted to an accredited trade repository just one day after the transaction is done. That reporting requires having a common reference number for each transaction which might not automatically exist unless the trades were executed on an electronic platform. There is also an obvious need for trades to match which might not take occur automatically unless an outsourced service provider is used.
Reporting on securities finance transactions– namely securities lending deals — completed through agent custodian banks as middlemen could be challenging and lead to potential errors. The transactions must be reported as the granular level of the underlying beneficial owner– aka the fund manager’s fund client — rather than at the higher level of the agent bank. Last but not least, under SFTR any changes to a securities finance transaction such as the rebate or collateral, must be also reported.
Given the SFTR’s intricacy, it’s no wonder that US securities finance managers are worried about how they will deal with any future US version of the SFTR. The OFR did not return emails seeking comment on its next step. In a press release announcing its new rule last month, the OFR says that it needs the information on cleared repos to help the Federal Reserve System monitor the financial stability of the securities finance market and to support the calculation of certain reference rates, particularly alternatives to the London Interbank Offered Rate (LIBOR) which is the predominant derivatives and fixed-income valuation benchmark.
The UK’s Financial Conduct Authority, which oversees the LIBOR benchmark administrator, says LIBOR will no longer be available after 2021. A committee of the Federal Reserve Bank has selected the Secured Overnight Rate (SOFR), based on the overnight US Treasury repo market as a replacement to LIBOR for US dollar derivatives and other financial contracts.
Confirming it is ready to meet the OFR’s current rule, the DTCC appears to be bracing itself for a possible expansion of the OFR’s reporting requirements. “While cleared repo is a small segment of the overall repo market, the new data collection effort will allow OFR to test data standards and methodologies before a wider SFT rule is rolled out to the market,” writes Mark Steadman, an executive director at DTCC in a September 2018 article posted on the DTCC’s website.
Steadman, who also serves as the European head of product development and change management for DTCC’s global trade repository (GTR) goes on to tout the merits of financial firms using the GTR as a single reporting location should there be an increase in global SFT (securities finance transaction) reporting obligations. The reason, he says: the GTR offers efficiency and reduced complexity, aka one-stop shopping. A number of securities finance software providers and automated trade matching platforms — including EquiLend, IHS Markit, Pirum, and Xceptor — have already announced that they are preparing to help users deliver the data required under the SFTR to the DTCC’s GTR and other trade data repositories.
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