11th June 2019

Investment banks ‘overconfident’ on SFTR compliance, according to Luxoft

New research from Luxoft has revealed that Tier one, two and three investment banks are overconfident for the EU’s new Securities Financing Transactions Regulation (SFTR), which comes into force next April: 99 per cent of senior compliance professionals responsible for implementing the regulation are confident they will meet the requirements, yet Luxoft’s Regulatory Outlook Report shows that this confidence may be misplaced.

For Tier one, two and three investment banks, 98 per cent will be relying on systems and process infrastructure used for past regulations such as EMIR to comply, yet 74 per cent acknowledge that SFTR compliance will require a much more complex IT infrastructure than EMIR or MIFID.

Furthermore, 72 per cent agree that SFTR implementation will be more costly than EMIR or MIFID, with 30 per cent saying the cost of hiring new talent will be the most expensive aspect. Despite these issues, 48 per cent have conducted a cost benefit analysis of the regulations, or set up a planning committee (46 per cent), centralised their SFT reporting (39 per cent), or hired a trade repository (TR) (26 per cent).

Geoff Hutton, EMEA Regulatory Specialist at Luxoft, said: “SFTR is the most demanding piece of transaction reporting regulation the sector has seen, and firms seem overconfident on delivering on the requirements when there is a vast amount of work to be done, with very little time to spare.

"Our research suggests that the industry’s confidence can be attributed to banks’ experiences with previous transaction reporting requirements and existing infrastructures. Some of the groundwork from these regulations will help firms to comply; however, SFTR presents a completely different set of challenges. Capturing the data required and putting in place the processes and technology to report efficiently will be a huge and costly challenge which firms are not prepared for.”

Senior compliance professionals in the investment banking sector remain largely positive on the role and impact of regulation, with only 40 per cent reporting ‘regulatory fatigue’ at their firm. Furthermore, 78 per cent of firms recognise that investment in compliance for regulatory initiatives such as SFTR makes their market position stronger and more resistant to new entrants and brings some business opportunities such as streamlining in-house processes (62 per cent), improving the use and risk management of collateral (58 per cent), and boosting the transparency of funding (57 per cent).

Mr Hutton continues: “Compliance burdens have soared over the last decade and SFTR will add significant pressure to firms, which, coupled with Brexit constraints, could leave many vulnerable to costly regulatory risks. With the 2020 deadline fast approaching, banks should start establishing SFT activities, understand trigger events and report types and decide how they will build or outsource their software solutions. By effectively implementing SFTR, not only do firms mitigate future risks but they could also realise the business benefits that this new regulation brings.”