Dear CEO | Release Date: 5th September 2022
To read a shorter summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Long Summary
This letter represents the inaugural communication from the Financial Conduct Authority (FCA) specifically targeting Trade Repositories (TRs) and Securitisation Repositories (SRs). These entities are critical to the FCA’s strategy for overseeing the financial markets, particularly in the realms of derivatives and securitisations. The letter outlines the regulatory environment under which these repositories operate, identifies key risks associated with their activities, and details the expectations for compliance and operational integrity.
Background and Role of Repositories
Trade Repositories (TRs) were developed in response to the 2008 financial crisis with the primary goal of increasing transparency in the derivatives markets. Their duties include the collection, maintenance, and reporting of data concerning over-the-counter (OTC) and exchange-traded derivatives to regulatory bodies.
Securitisation Repositories (SRs), introduced post-crisis, play a similar role in the securitisation market, gathering and maintaining data on securitisations that require an approved prospectus under financial regulations. They serve to provide clarity and data accessibility to investors, aiding them in making informed decisions.
Regulatory Supervision Framework
The supervision of these repositories is structured under several legislative frameworks, which have been adapted from EU regulations to fit the UK’s regulatory environment post-Brexit. These include:
For TRs:
- UK EMIR (European Market Infrastructure Regulation)
- UK SFTR (Securities Financing Transactions Regulation)
- Associated transitional regulations following the UK’s exit from the EU
For SRs:
- The UK Securitisation Regulation
- Related amendment and transitional provisions
Each framework provides specific guidelines and standards that repositories must adhere to, ensuring that they operate within the legal requirements set forth by the UK government and the FCA.
Identification of Key Risks
The FCA’s letter specifies several risks inherent in the operation of TRs and SRs, along with expectations for how these risks should be managed:
Trade Repositories (TRs):
- Concentration Risk: The market for TRs is characterised by a limited number of service providers, which could lead to issues such as lack of competition, high pricing, and potential service quality degradation.
- Operational and Technological Risk: TRs must ensure robust technological infrastructure to prevent data loss or inaccuracies and to maintain uninterrupted services to both market participants and regulators.
Securitisation Repositories (SRs):
- Market Adaptation Risks: Being relatively new, SRs must navigate a developing market landscape influenced by both economic conditions and evolving regulatory standards.
- Data Management and Third-Party Engagement Risks: Accuracy in data reporting is crucial. SRs must also effectively manage third-party services to ensure compliance and operational efficiency.
Supervisory Priorities and Actions
The FCA emphasises several supervisory priorities:
- Operational Resilience: Repositories need to develop and maintain resilient systems that can quickly recover from disruptions to ensure continuous service and compliance.
- Service Quality and Competition: TRs are urged to review their service offerings regularly to ensure they are of high quality and competitively priced.
- Data Integrity: Ongoing efforts should be made to improve the accuracy and reliability of reported data.
Compliance Expectations and Monitoring
Repositories are expected to:
- Engage proactively with the FCA, ensuring transparent and continuous communication.
- Monitor and evaluate their compliance processes regularly to align with both existing and new regulatory requirements.
- Address and rectify any identified deficiencies in operational and data management practices promptly.
Key Takeaways and Actionable Steps
For CEOs and senior management of TRs and SRs, the letter highlights the importance of:
- Regulatory Alignment: Ensuring all operations are fully compliant with the detailed regulatory standards set out by the FCA.
- Risk Management Excellence: Actively identifying, managing, and mitigating risks, particularly those related to operations and data handling.
- Transparent Communication: Maintaining open channels of communication with the FCA, especially in reporting operational changes or issues.
- Continuous Improvement: Regularly reviewing and enhancing internal controls and procedures to stay ahead of regulatory changes and market developments.
Conclusion
The FCA’s letter serves as both a directive and a reminder of the stringent requirements and high standards expected of TRs and SRs. Adhering to these guidelines is essential not only for regulatory compliance but also for contributing to the overall stability and transparency of the UK’s financial markets. The letter underscores the need for ongoing vigilance, adaptation, and proactive engagement with regulatory bodies.