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With the Securities Financing Transactions Regulation (SFTR)
implementation in the rear-view mirror, can the buyside industry
finally take a breather on regulation reporting? It depends.
As we touched on in a previous article (
Entity Data Is the New Oil), regulators have begun to focus on
the quality of submitted data and will start flexing more
enforcement muscles to ensure adherence to reporting
regulations.
The buyside was first impacted by regulation reporting rules
with the onset of the European Market Infrastructure Regulation
(EMIR) in 2014. As this was a new requirement, many buyside firms
chose to delegate reporting to anyone that would take it (brokers,
exchanges, clearing houses, matching platforms, custodians, etc.).
For several years that model generally worked.
However, as additional global regs came into effect - such as
the Markets in Financial Instruments Directive (MiFID II), SFTR,
Australian Securities and Investments Commission (ASIC) and
Monetary Authority of Singapore (MAS) - the delegated model began
to break down. Several market events also contributed to its
deterioration, particularly for European reporting regimes:
Dealers withdrawing delegation offerings for certain
clients
Concerns over personal data being shared with third
parties
Withdrawal of key central counterparty clearing house-delegated
reporting offerings
Consolidation and exits in regulatory reporting vendor
solutions
The combination of these events created a fragmented and
operationally challenging situation for many clients, especially
asset managers, hedge funds, pension funds and investment managers,
who historically relied on the delegation of reporting
obligations.
In a real example, a UK hedge fund could have delegation
agreements as follows across multiple trade repositories, National
Competent Authorities (NCA), Approved Reporting Mechanism
(ARM)/Asset Purchase Agreement (APA):
Five bilateral over-the-counter dealer counterparties
Three exchange-traded derivative exchanges/clearing houses for
futures reporting
Ensuring that each of the 14 parties above has reported data
accurately and in a timely manner is no small task. Operationally,
this creates a significant challenge for firms to see a holistic
view of their reporting. If some counterparties offer delegated
reporting, they may need to log onto their clients' in-house
solutions. If some trades are reported direct to a trade
repository, then they will be required to log in to the trade
repository portals.
The biggest catalyst in the shifting landscape commenced with
MiFID II going live in 2018. Personally Identifiable Information
(PII) was required to be reported for traders and advisors. This
was no longer just reporting traders' names and locations, but
their "national identifiers" or passport numbers. Understandably,
many firms were not comfortable sending PII data to a third party
and took on the responsibility of reporting to an ARM or NCA
directly in order to protect the PII data. Taking MiFID II
reporting in-house was the first step along the journey toward
deciding what type of reporting solution and governance made sense
for each firm.
Obvious questions start arising: If I'm doing my own reporting
for MIFID II, does it make sense to do the same for EMIR, ASIC or
SFTR? There are some considerations to keep in mind.
Under SFTR, there are up to 155 fields to collate for reporting
from different Order Management Systems (OMS) used by the buyside
with short timeframes, T+1 for trades, S+1 for collateral. The
dual- sided reporting element of this regulation has provided
another challenge. Up to 96 out of the 155 requested fields need to
match with the other counterparty of the trade within tight or zero
tolerances. Some fields were not captured in the past or not in the
same systems feeding into transaction reporting flows. Many buyside
firms initially planned to delegate under this regulation as well,
but, due to the complexities of dual-sided matching requirements
and opportunities to leverage technology in meeting obligations,
many firms sought to update their target operating model and
improve transparency and operational workflows in parallel. As
such, outside of pure agency securities lending activity, it makes
more sense for the buyside to take reporting on themselves (either
direct to a TR or via a vendor).
Over the last several years, more and more buyside firms have
started to take reporting back in-house or, at least, enhance their
operational processes to check, record, reconcile and manage the
myriad reporting providers and destinations that touch their data.
The risks of delegation have started to stack up and tilt the
scales back towards having more control to the party obligated to
report. This makes sense when you consider that any penalties
levied by the regulator will fall with the delegating firm.
As regulators increase focus and scrutiny on data being
reported, many questions are being asked that often don't have
straightforward answers - especially if firms don't know what's
been reported on their behalf. There is an opportunity now,
particularly before the next buyside reporting mandate in Singapore
(October 2021) to revisit existing solutions and evaluate the
options best suited for your firm's needs. Is the solution to
insource everything and report yourself, utilize a vendor, continue
delegating to counterparties, enhance reconciliation processes or a
combination of all these?
Each organization needs to make that decision based on its
specific situation, but trends are showing control, ownership and
accountability of regulatory reporting is a necessity for buyside
institutions around the world.
Posted 30 November 2020 by Igor Kaplun, Executive Director, MarkitSERV, IHS Markit
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
