Possible Repercussions of Securities Financing Transactions Regulation in the Asia-Pacific region
The Securities Financing Transactions Regulation (SFTR) is an EU regulation designed to enhance transparency within the Securities Financing Transactions (SFT) market by standardizing trade repositories. The regulation requires counterparties to SFTs to report the details of the transaction to a central database, usually a trade repository In-scope transactions are reported on T+1, and may also require two-sided reporting if both parties are impacted by SFTR, i.e., both parties to the transactions are obligated by juridical regulations to report.
Securities lending transactions under scope are defined as: repurchase transaction, securities or commodities lending or borrowing, buy/sell-back or sell/buy-back transaction, margin lending transactions restricted to the prime brokerage activity, a Total Return Swap (TRS) transaction applicable only to Undertakings Collective Investment in Transferable Securities (UCITS) and Alternative Investment Fund Managers (AIFM) to disclose their use of TRS in their periodic reports.
DIRECT IMPACT
SFTR affects APAC branches of EU firms, as well as EU branches executing transactions of third-country counterparties, which are now obligated to report their SFT to an authorised trade repository. There are up to 155 reportable fields within the required ISO 20022 format for SFTR. Counterparties are expected to report the conclusion, modification and termination of each event, which requires its own report, thus compounding the total amount of reportable fields in a single trade lifecycle consisting of multiple events.
INDIRECT IMPACT
The regulation may also indirectly affect third country counterparties trading with EU counterparties where they are not within scope, as their affected counterparty will request relevant additional data points not requested previously as industry standard. This requires the implementation of enhanced internal reporting in order to provide such data. Â It would be reasonable to predict that failure to do so would result in a breakdown of relations within relevant counterparties for such APAC entities.
CHALLENGES
The increase in reporting requirements directly impacts trading and collateral management activities. Affected financial institutions will have to manage sourcing relevant data points coming from many sources and stakeholders, involving complex flow that would require more efficient collaboration.
SFTR may clash with local secrecy laws and regulations. Under the Agency Lending Disclosure process, only agent lenders instead of principal lenders are disclosed. However, this is impossible under SFTR which requires principal lenders to be identified by LEI. This may result in discreet Asian funds withdrawing from business altogether. Asian firms may also be less willing to engage in SFTs with EU firms to avoid the legal obligation of reporting more data under SFTR and increased exposure to EU regulators.
FORECAST
APAC financial institutions with no EU ties will become more competitive than their EU competitors in the short term and could capture overall market share from shifts in EU securities lending to the APAC market as investors look to avoid the costs and requirements of the regulation. However, the situation may not persist if Asian regulators eventually solidify plans to implement securities lending regulations of their own.
Based on their previous track record of adopting financial regulation, Asian regulators are more likely to take a wait-and-see approach with respect to SFTR. Such was the case for the adoption of OTC derivatives reporting in several Asian countries. For example the EU had begun with OTC reporting under EMIR in 2012, but it took several years for Asian regulators to eventually pass their own regulation into law. Hong Kong passed the Securities and Futures Ordinance in 2014 and Singapore in 2018 under the Securities and Futures Act. The delay in adoption would give Asian regulators time to observe any adverse effects or teething problems caused by the regulation and pre-empt them for the future. Therefore, it is likely that the same may happen to securities lending regulation in Asia and financial institutions would do well to brace themselves for its impact.Â
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Sources:
https://www.regulationasia.com/sftr-what-asian-financial-firms-need-to-know
https://www.globalinvestorgroup.com/articles/3691987/sftr-the-impact-on-asia
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32015R2365
https://www.esma.europa.eu/policy-activities/post-trading/sftr-reporting
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About the author
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Audrie Goh is a Consultant at JDX Consulting with demonstrated experience in Private Banking Financial Crime Compliance and KYC/AML functions. Her most recent role as Project Business Analyst for Data Governance at a Global Investment Bank sits within the Client Lifecycle Management & Control space, which entails assessing the rationale, requirements, business logic, and sunk cost of data fields to be implemented in the migrated system alongside senior stakeholders from various functions.Â
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About the Company - JDX Consulting
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JDX is a global consulting company that specializes in aligning bespoke solutions to financial services clients in areas of change management, remediation, technology and advisory projects. Driven by our core values and unique culture, we create opportunities for our clients, firm and people, by providing strategic, technology and operational consulting services.