Returns Reporting

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Status: Best Practice Finalised, Last Updated: 10/08/2021

Question:
In relation to actual or contractual settlement date, what is the best practice for reporting return legs of SLEB transactions?

Best Practice:
Within SLEB, there are currently two methods of reporting returns that have been built into SFTR reporting systems. ISLA no longer recommends that all firms adhere to the ISLA developed best practice for reporting returns, as regulators have made clear they do not intend to change their guidance.

The ESMA position for reporting returns, as stated within their guidelines document, is as follows.

• Partial Returns: Should be reported on a contractual basis (i.e. contractual settlement date + 1) ignoring settlement failure in the market. These should be reported with a MODI (reducing quantity). When the final value is returned fully, this should not be reflected by a MODI reducing the quantity to '0'.

• Future dated full Returns: Should be reported on a contractual basis (i.e. date of agreement + 1) If on the day following the contractual maturity date the trade has not settled, a MODI report should be sent moving the maturity date to the following day or the day on which it is expected to settle until the return settles.

Due to the current XML schema and validation rules, for open term trades this is reported by sending a MODI to add a 'Maturity date', modify the trade to fixed term (2.21 Open Term changed from TRUE to FALSE, 2.22 Termination Optionality changed to 'NOAP').

• Same day full returns: Should be reported on an actual basis (i.e. actual settlement date + 1) by sending an ETRM.

The contractual reporting element of the guidance that ESMA has provided, is not operationally possible to enact within agency lending programmes, for legal purposes. Therefore, most agent lenders as well as other participants, opt to report returns using best practice developed by ISLA. ISLA suggested this market practice to ESMA as part of the original consultation, and subsequent Q&A processes for SFTR, however this approach was not adopted.

ESMA's guidance to report returns in this way, was not released until January 2020. Vendors and many proprietary system owners had already built to the ISLA developed model and agreed that it was too late to adjust prior to Phase 1 go-live. The majority of firms continue to use the ISLA developed model, due to the significant build cost and potential for guidance changes as part of the upcoming review of SFTR due in January 2022.

The ISLA developed best practice for reporting returns, which was formulated by the ISLA SFTR Working Group, as follows.

• All returns reported on an actual-settlement basis and not contractual, with no requirement for advising failed status reporting.

• Partial returns: should be reported with a MODI (reducing quantity). When the final value is fully returned, this should not be reflected by a MODI reducing the quantity to '0'.

• Open term full returns: should be reported with an ETRM on an actual basis.

• Fixed term full returns: should not be reported will not be reported (Once the maturity date has passed, the trade is marked as matured at a TR level and closed). Settlement failure for full return of fixed-term will report a MODI, extending the maturity date, repeated until settlement.

Currently, the expectation is that the SFTR legislative review is due to take place in January 2022. (SFTR-337)