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Questions arise amid new buyside regulation reporting rules
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
- Two OTC matching/confirmation platforms
- Three OTC execution venues (Multilateral Trading Facilities (MTF)/Organized Trading Facilities (OTF))
- One agent lender
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.
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.
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