SFTR Validation Rules Updated. Why and What Happens Next?
Highlights Checklist
- New SFTR Q&As published on 31 March 2023.
- New SFTR validations will come into force in Production from 11 September 2023.
- Updates were lighter than expected, overall, we estimate impact to be minimal for Cappitech clients.
- Cappitech plan to reflect the new validations in our UAT environment prior to Go-live to enable clients to test the changes ensuring a smooth transition on 11 Sept. A UAT date will be communicated to you shortly.
- It is unknown whether (or when) the FCA will adopt ESMA’s changes as-is in order to avoid reporting firms having to support divergent reporting logic.
Summary of Recent SFTR Updates for Firms to Note
The market’s reaction to the recent 08 March SFTR Validation Rules update barely moved the needle, so mild were the changes.
It would seem ESMA chose to skip this opportunity to trigger any significant evolution in their guidance to tackle common SFTR reporting issues, for example: only one currency field, how to capture fees or haircuts, non-LIBOR/EURIBOR rates and missing LEIs amongst a number.
Firms have had little news on SFTR for a year since the post-Brexit-transition UK validation rules came into force in April 2022.
One possible explanation is that ESMA planned to complement the 08 March update with New SFTR Q&As recently published on 31 March. In fact ESMA simultaneously published Q&A updates across 6 regimes: New Q&As available (europa.eu)
For SFTR, the only new item is SFTR Q&A #15 which clarifies that when completing the “Jurisdiction of the issuer” fields 2.53 and 2.92 reporting firms should use the country of the registered office of the issuer as per the “Legal address” field contained within the GLEIF database.
What do these changes tell us regarding ESMA’s evolution of the SFTR dataset?
Regarding SFTR data quality, the most accurate insights at a global level are ESMA’s own annual Data Quality Reports which were published in 2020 and 2021.[1] In the second edition of the report, ESMA stated that following a 50% reduction in volume post-Brexit SFTR data quality indicators like rejections and reconciliation rates were showing a gradually improving trend following several steps such as updating the XML schema and implementing a log of data quality issues.
Updating such a wide swath of regulations simultaneously probably resulted in some give-and-take between the list of priorities and stabilizing their markets dataset to enhance their self-stated goal of “using data for evidence-based policy development, supervision and risk assessment”[2]
[1] esma74-47-607_2021_emir_and_sftr_dq_report.pdf (europa.eu)
[2] Page 31, ESMA Strategy 2023 – 2028 (europa.eu)
Another possibility is ESMA might have considered anything more than small tweaks to reporting data might disturb consistency within the dataset they query for their surveillance monitoring obligations.
What next for Cappitech Clients?
ESMA’s delayed validation rules come into effect on 11 September meaning most firms will need to review them over the next few weeks to determine whether they must undertake any changes to their SFTR reporting infrastructure. The new validations impact both Trade and Position levels but not extensively, our Client Account Management team has already emailed a field-by-field analysis to all Cappitech SFTR clients.
As far as the change to the Conditionality of the “UTI” field goes when reporting Collateral, Cappitech clients should note our SFTR solution offers core UTI creation and sharing functionality meaning firms can simply continue to report with their own internally-generated Trade ID on Trades or Collateral. We use your Trade ID to pair with your counterparty to determine who is UTI generator then create the UTI. In short, you can continue to report Modifications or Collateral with your own Trade ID and we make the linkage with the UTI within our solution.
Liaison with our Partner Trade Repositories
To help you control the change risk associated with the new validations we contacted our partner TRs to establish their UAT dates. You will be able to perform “round-trip” UAT testing with TRs as of the following dates:
- DTCC UAT: August (date TBC) Prod: 08 Sept
- Regis: UAT: 15 June (confirmed) Prod: 09 Sept
Should you have any further questions please contact your Cappitech Client Account Manager directly, or our Support Team directly on: GRRS-Support@ihsmarkit.com (Cappitech SFTR clients) or SFTR_SUPPORT@ihsmarkit.com (SFTR system clients).
