ESMA Q&A update on Reporting of settlement fails under SFTR

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Status: For Review, Last Updated: 31/08/2023

Question:
Further to Question 2 of ESMA’s SFTR Q&As update (25/Jan/2022) on the reporting of settlements fails, which states:

“Counterparties should report the remaining or outstanding SFT with a new UTI and specify accordingly the complete and accurate details of that SFT and its maturity date.”

ISLA members raised a number of strong concerns such as:

•The unsettled trade(s) remain reflected on books and records as an active exposure, the act of generating a new UTI for regulatory reporting would impact up-stream processes. For example, new trade generation is based on trading desk authorities which create new exposures, draws down trading limits and requires new collateral.

•The unique nature of the proposed new trade would create double counting of the existing trade,  that is not settled and remains active for purpose of exposure and risk measures in Securities Lending platforms until settlement occurs.

•The proposed fictional trade could create entries in lending ledgers that break concentration limits (e.g., UCITS Efficient Portfolio Management).

•Further concerns include the different abilities of the diverse market practitioners. Specifically, that counterparts to a trade would react at different times and ways that will increase reconciliation challenges. E.g. where one party changes and the other has not at the same time.

•A further concern is the accounting within agent lenders books and records where the lender’s loan(s) exist within a shell/omni structure. Creating a ‘new’ trade would fall outside that structure and be unrecognizable to the borrower.

ISLA members agree that reporting should reflect the realities of settlement state and resulting exposures, however the nuances of different SFT markets create a challenge that this recent amendment compounds. 

Best Practice:
ISLA members propose several pragmatic approaches that might be consider as potential alternative solutions to this challenge:

1. Relaxing Validation rules for the maturity dates of the trades regarding reporting failed settlements.

2. Introducing REVIVE functionality to re-open the historic closed transaction in SFTR reporting in alignment with EMIR reporting.

3. Adding the requirement to report failed settlement on a maturing SFT in the Level 2 legislation.

Benefits:

•This will provide an explicit reporting obligation for firms to comply with and ensure that all in-scope firms would report a “MODI”.

•This will also ensure a ‘consistent’ reporting approach by counterparties to a transaction.

4. Allowing reporting flexibility:

•Removing the block on back-dated reporting and report corrections after the reporting window for maturity or termination is closed.
Or
•Increase the settlement date to SD+2. The extra day would ensure accurate and consistent reporting of settlement fails by both counterparties to the trade. (SFTR-817)