ESMA’s new SFTR validation rules – still playing roulette with data accuracy

The highly anticipated new ESMA SFTR validation rules (and corresponding minor XML schema changes) were finally published on 8 March, coming into effect on 11 September 2023, leaving nothing but a damp squib in their wake.

Having been pre-warned by ESMA that no new guidelines or the delayed SFTR Review were imminent, nor likely this year, it was something of a disappointment to find so little advancement on the path to regulatory certainty. This is a missed opportunity to enrich the ‘Conditional validations, format and content’ and ‘Details to be reported’ columns to capture new post-Libor interest rates, precise definitions of collateral/security type, and provide clarity around jurisdictions, haircuts and other contentious fields. We will continue to roll the roulette wheel as to whether “valid” reports are right or indeed remain “valid but wrong.”

The changes only affect the ‘General information’ and ‘Cpy_Transaction’ tabs. General information simply clarifies that correction “CORR” messages can only be used to repair loan data or loan and collateral data but not only collateral data. Any collateral changes, corrections or not, should be made using a collateral update “COLU.”

The ‘Cpy_Transaction’ tab contains the bulk of the changes:

• The additional sector classification field (1.6) has now been made consistent across all action types, conditionally required for errors, early terminations, collateral updates and valuation reports.  
• Unique transaction identifiers (UTI) (Field 2.1) are now mandatory for repo, buy-sellback and securities lending collateral updates where collateralization of net exposure is false. This does close a loop-hole and ensures collateral can be more easily accounted for.
• Type of collateral component (2.75) has had conditional validations clarified, around the need for it to be populated for corrections containing collateral information and position components. This removes the previous anomaly where it required for corrections and position components, even on uncollateralised securities loans. 
• Collateral unit of measure (2.84) is no longer required under any circumstances for securities lending trades. This is slightly curious as it is still permissible (albeit highly unlikely) to have commodities collateral on a securities loan.
• Haircut or margin (2.89) – still misnamed (margins are not acceptable), has a single somewhat confused additional condition that “The absolute value of this field should range between 0 and 100.” However, quite rightly it still allows negative as well as positive values and capping it at 100 only partially prevents the incorrect reporting of initial margins (as opposed to haircuts) as specified in the “Details to be reported.” The cap could have been set rather lower than 100 to make this condition truly effective.
• Finally, the Level field (2.99) has been tweaked, no longer required for new or modified margin loans (only transaction level reporting is possible) and the position component action type (have you ever seen one?!) is only valid for transaction level reports.  

That’s all folks! Hopefully the UK FCA will follow suit without delay, preventing two-speed SFTR re-occurring later this year and into 2024.

• The new rules and schemas are available on ESMA’s website.

• If you are concerned about falling into the “valid but wrong” trap with your SFTR reporting, our ReportShield quality assurance services can help. Please contact us for a conversation about how we can get your SFTR reporting accurate.