VP Securities helps the Danish financial sector comply with SFTR

The Danish financial sector, working in collaboration with VP Securities, has adopted a simple way of exchanging the Unique Transaction Identifier (UTI) required under the Securities Financing Transaction Regulation (SFTR), via SWIFT, and by using the existing VP infrastructure. The result is an efficient, low-cost solution that could potentially benefit the entire European financial sector.

19.03.2020

While SFTR was adopted in December 2018, little progress has been made on finding an efficient way of generating and reporting the UTI. “The sector has spent two years trying to come up with a smart solution. Everyone wants to find the least cumbersome way of doing this,” comments Line Samuel Vesth, Senior Specialist, Wealth and Markets Operations, Nykredit. “There are basically two solutions that have been proposed so far. One is to handle the UTI generation and reporting process manually. The other is to enlist the assistance of a third-party. The latter approach, however, is not only costly, but also includes security-related concerns, as it potentially involves sending confidential information to a party not involved in the transaction.”

update - 20 march 2020

Due to the impact of Covid-19 on securities markets; including the financial companies’ actions to minimize contagion, ESMA has issued a Public Statement acknowledging the challenges affected entities are facing before SFTR reporting go-live date 11 April 2020. ESMA expects competent authorities ”not to prioritise their supervisory actions” before 13 July 2020, thereby unofficially granting a three-month postponement of the original reporting deadline.

Finding solutions in the existing infrastructure

As a member of Finance Denmark’s SFTR workgroup, Line Vesth and her colleagues were looking for a way to use the existing financial infrastructure to meet the UTI requirement. They approached VP Securities to find out if it was possible to use the existing settlement infrastructure, via SWIFT messages or a similar proprietary format, to exchange UTI information between the counterparties. As it turns out, they had come to the right place.

“We have a strategic ambition to offer regulatory services that can help our customers comply with the myriad of regulations impacting our industry,” states Frederik Stokholm, Product Manager at VP. “And to do that, we focus on leveraging the infrastructure we already have in place. We’re used to receiving and transmitting data, and to meeting continuous deadlines. We’ve also already taken much of the costs associated with the functionality for exchanging the UTI, because we already have the system in place. So, when the SFTR workgroup approached us, we were more than willing to work with them to find a solution.”

The solution: use the CSD as a conduit

In the solution, adopted by the Danish financial sector, VP functions as a gateway between the counterparties. The counterpart who generates the UTI enters the data into a designated SWIFT field, and sends that information to VP. VP then transfers the UTI reference to the non-generating UTI counterpart. “We’ve programmed logic into our data communication so that we can transfer the UTI from one counterpart to the other,” Frederik Stokholm explains. “This way the non- generating counterpart can receive the UTI on the trade date using our existing infrastructure, given VP receives instructions from both parties on the trade date.”

A simple approach that ticks all the boxes

VP and the SFTR workgroup met to discuss the scope of a potential solution in September 2019. The solution was presented to the SFTR workgroup in December 2019 and accepted as Danish market practice. “We often talk about creating sector solutions, yet it can be a challenge to get the entire sector to agree on one approach. That we were able to get the sector to agree so quickly says a great deal about the simplicity and practicality of this solution,” says Frederik Stokholm.

Line Vesth agrees, and adds that the solution is in harmony with what SFTR regulators hoped to achieve. “While the regulators can’t tell us which solutions to choose, they have, through the legislation, emphasized the importance of finding a simple solution that everyone can use, where we can exchange the information electronically, in a standard format, and as quickly as possible. Our solution lives up to all of those requirements.”

Reuse is the way forward

Given the large number of regulations taking effect this year, it’s imperative that the financial sector can find straightforward, cost-effective solutions. “We have three to four massive regulations that take effect in the same year. And compliance is all costs, and no revenue. So, we have to find ways of reusing existing infrastructure to satisfy these requirements,” explains Line Vesth.

And as Frederik Stokholm points out, this collaborative approach of working with parties along the value chain is the best way of identifying best practice solutions for meeting legislative requirements. “We have to improve our ability to get the most out of what we’ve already built,” he states. “This solution is an excellent example of how we can leverage existing infrastructure to meet new regulatory requirements. In this case, 90% of the solution was already in place, so we only had to develop the final 10%. Although it’s not a requirement for VP to offer this service, we see it as an opportunity to innovate, offer a value-added service to our customers and help ease the burden of compliance.”

About SFTR

The Securities Financing Transaction Regulation (SFTR) takes effect in April 2020. SFTR requires all securities financing transactions (SFTs) to be reported to trade repositories (TRs), and that each transaction be assigned a unique transaction identifier (UTI). Each UTI consists of 52 characters, and the same UTI should be used by both counterparties to a transaction.