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It’s automation, not automagic!

Chetan Joshi

September 28, 2020

At Margin Reform, we recently held our second webinar with Scott Brown of Pirum Systems LTD and Nicholas Larrieu of DTCC Europe Limited. During the webinar, we went through many aspects, some of which I have summarised here.

We started with the successful launch of SFTR and went on to review the challenges this will present for the buy-side and some of the solutions available to overcome these.

So what’s happening in terms of SFTR? Has it been a success? What are the problems?

Many feel that the first two phases of SFTR were a success. The industry working groups and the vendors that have hosted preparation sessions over the last few years have certainly done duty to the industry. On day one of the reporting, it was reported that all four PRs opened their systems and started receiving and processing SFTR data with no disruptions, citing after that the first week had gone smoothly.

The SFTR regulation has been brought into place to improve transparency and monitor the risks associated with the financing transactions market. There has been debate over whether the buy-side could extend delegated reporting, which is likely to be considered on a case by case basis.

One of the known issues has been the management of settlement instructions. While everyone is responsible for their own SSIs, ALERT is a utility that can be used as storage for those SSIs across multiple products and asset classes, helping streamline the reporting process for Investment Managers by taking direct feeds from the custodians. The buy-side is then only left with the entitlement process to manage their broker’s access to the SSIs.

ESMA guidance published at the beginning of the year appeared to widen the scope for hedge fund asset managers and margin lending. However, this has subsequently been clarified by the commission so that it is now the jurisdiction of the fund to determine the reporting requirement. If you do conduct margin lending business, then you will need to report it. This may be a one-sided submission in the case of the prime broker, but if the fund is in scope, then they will need to report as well. The broker will submit two sides of the deal on behalf of the fund.

For future phases, preparation is vital. The majority of those impacted by phase 3 will already be well into their projects (28/9 – go-live next month). The challenge of going into phase 3 or 4 is that if you’re not preparing now and you are not engaged with your vendors or your trade depositories, and you’ve not made those kinds of selection choices then it is starting to get close to the wire to get on board and get through testing.

You need to ensure that you understand what the requirements are. Make sure you can handle them and work with them.

For the buy-side, we saw with phase 1; there are going to be challenges where people assume that they can build to the schemers, and they will get close to the wire and realise that they don’t have the right partners or technical capabilities in house.

The collateral ecosystem is more extensive than ever, and it is becoming more automated. That’s why we all must understand the number of different partnerships involved. These partnerships are where people are bringing different values to the market. You have to consider your starting point, what does it look like, strategically where are you headed with your collateral book, do you have security finance and a derivatives business, are they going to get more joined-up, is your front and back offices knitted together. It is a holistic product, collateral and people need to start realising this and start working on it.

The value to an efficient post-trade space is clear to the front office, understanding where inventory is, where you are failing, and the impact to the inventory is key to both sides. Inventory management has historically been a challenge, and the back office is starting to move now into more of that ecosystem. In collateral, that innovation is starting to spring up.

We should be moving to a no-touch workflow from a trade perspective. If we look to the future, technology can help. If you are a sell-side firm or a buy-side firm looking at technology down the line, it would be best to look at getting as much connectivity, value and automation from your incumbent vendors as possible.

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