David Woolcock 10-Jan-2020 17:30:00 7 min read

Starting the New Year with a call to arms!


As we settled down to the first full working week of 2020, ESMA published the latest and final set of papers on the Securities Financing Transactions Regulation (SFTR) with guidelines on reporting structures.  This was accompanied by the amended SFTR validation rules and a statement on Legal Entity Identifiers (LEI). The good news is that it now clarifies a number of provisions pertaining to SFTR, alongside some practical guidance.

It confirms there will be no extension to the SFTR timeline, and thus it will go live in just a few months on 13th April 2020. The updated SFTR validation rules are a big help and are aligned with the XML schemas published in December 2019. We are hopeful that further amendments will not be forthcoming which should help in keeping costly changes at bay, though significant challenges will still exist as we get testing underway given the room for interpretation in the requirements. We need and fully expect that National Competent Authorities (NCA) will be lenient in enforcement as long as firms can demonstrate that they have made genuine efforts to be SFTR compliant. 

Looking at the statement on LEIs, ESMA is recognising that there are difficulties and has granted a formal grace period. The correct reporting of an LEI is a requirement for the compliance of an SFT report within the reporting obligation. The correctness and completeness of an SFT report will be verified by a registered or recognised Trade Repository (TR). Given that 88% of instruments issued by EU issuers have an LEI, and only an average 30% of non-EU issuers have one, reports with third country entities that do not have an LEI will be accepted for 12 months from the entry into force i.e. until 13 April 2021. 

One of the big challenges firms face with the introduction of the SFTR is that of data management. Firms need to bring together and format a range of data from many sources in an efficient and timely manner. Firms with the foresight to have put in place robust regulatory reporting software, rather than a temporary fix, will see the work done for EMIR and MiFIR ease the burden of becoming SFTR compliant. To stand a chance of being compliant in the remaining few months, firms must rapidly choose their provider to assist in SFTR reporting to complement internal capabilities. 

Compared to MiFID II reporting obligations, the SFTR represents an additional level of complexity for transaction reporting given the greater number of data fields required to be reported, and a new set of validation and conditional rules to comply with. Even though we expect regulators to take a practical, risk-based approach to supervision and enforcement in the early days, after April 13th firms that had made genuine best efforts to be compliant it is not going to be easy to demonstrate that level of compliance. Firms that cannot report by the deadline are unlikely to see leniency but rather regulators demanding remediation while the prospect of fines will loom large for the non-compliant. Incompleteness and inaccuracy in existing/legacy reporting but with a good regulatory reporter module in place may find forgiveness. 

An additional complication is the date set for the SFTR go live is that it falls over an Easter weekend which will further complicate getting this right on day one. We would have expected the deadline to be shifted to take into account the operational difficulty this timing causes. The date is now set in stone so realistically the timeline is probably even shorter to get ready. I suspect many of us planning Easter breaks will need to re-visit our holiday plans this year! 

On that note I wish all our readers a Happy New Year and for those looking for a primer on SFTR please take a look at our earlier SFTR whitepaper at https://blog.eurobase.com/whitepapers/sftr-reporting-new-kid-on-block  


David Woolcock

David Woolcock is an independent consultant and Director, Business Consulting at Eurobase. In addition, David is Chair of the Committee for Professionalism at ACI – The Financial Markets Association as well as Vice-Chairing the ACI FX Committee. He is also a member of the Market Practitioners Group for the Bank of International Settlement's FXWG that wrote the FX Global Code.