TabbForum: SFTR Exposes the Cracks in Regulatory Reporting. Now it Must Drive Reform

Rising scrutiny, record fines and growing complexity across financial markets have underlined the need for more modern approaches to regulatory reporting. Leo Labeis, CEO & Founder of REGnosys, outlines why the Securities Financing Transactions Regulation (SFTR) should be the next catalyst for a simpler, more effective regulatory reporting model.

The regulatory reporting model built in the aftermath of the financial crisis is under strain. Reporting obligations have grown more complex, yet practices for many reporting firms have barely evolved. Many remain tied to costly fragmented architectures, while regulators still struggle to see the full picture of market activity. SFTR has brought these issues to light.

Designed to improve transparency in securities financing transactions, it instead revealed the limitations of a reporting model built on duplicated interpretation and reconciliation rather than shared understanding. The regulation’s objectives were not wrong, but the way it was implemented made complexity inevitable.The cost of this complexity is no longer sustainable.

Interpretation, not regulation

SFTR’s dual-sided reporting requirement and complex lifecycle events in the securities financing markets have created enormous volumes of mismatched data and forced firms to spend millions to reconcile reports. Two counterparties reporting the same transaction in good faith often produce entirely different outputs.

At the heart of the issue is the interpretation of the rules rather than regulation itself. Each firm translates the rulebook into its own proprietary logic, embedding that logic into internal systems. While SFTR mandated ISO 20022 to standardise the reporting format, it did not standardise meaning. A common message structure without a common logical model to derive the data simply codified inconsistency.

The financial impact is substantial. Recent studies show institutions spending millions of euros each year to comply with a single regulation. These costs ultimately reduce market liquidity and increase transaction costs for end investors. At a time when Europe is focused on competitiveness and growth, this is a problem capital markets can ill afford.

What SFTR reveals about the reporting model

SFTR is not an isolated case. It highlights a structural flaw in how regulatory reporting is designed and implemented. The traditional model assumes that interpretation happens independently at every firm, and reconciliation happens afterwards. This approach is expensive, inefficient and fundamentally misaligned with the goals of supervision.

Both ESMA’s and the FCA’s respective calls for evidence on simplifying transaction reporting across SFTR, MiFID and EMIR demonstrate that regulators care about addressing regulations’ adverse impacts. This gives impetus to a fundamental rethink of the industry’s approach.

Momentum behind Digital Regulatory Reporting (DRR), backed by industry bodies and market participants, points to a credible and appealing alternative. DRR combines two essential elements: a standardised input model (using the Common Domain Model to represent trade events in business terms), and a single, coded interpretation of regulatory rules that is written once, peer-reviewed and reused across the market.

Regulators have already tested this approach successfully. From the UK FCA’s digital reporting pilots to the EU’s MRER proof-of-concept, results consistently showed that machine-readable, executable regulation can reduce costs while significantly improving data quality and supervisory clarity.

While DRR is now well established in derivatives markets, with 8 reporting jurisdictions now covered, this approach extends to securities financing markets. SFTR faces many of the same challenges as derivatives reporting, and the CDM already supports repo and securities lending lifecycle events. Applying DRR to SFTR does not require a theoretical leap as the foundations are already in place.

From compliance burden to better data

Moving in this direction does not require a disruptive “big bang”. Industry trade associations, like ISDA, ISLA, ICMA and FINOS are increasingly driving consensus around common standards, and vendors are now positioned to mutualise implementation costs by delivering CDM-aligned and DRR-enabled reporting as standardised and best-practice-aligned rather than bespoke solutions.

Some firms already align with elements of this approach. Others can move incrementally through platform migrations, regulatory change programmes such as SFTR or MiFID refits, or broader cost-reduction initiatives. As digital assets and DLT-based markets accelerate, the case for a universal, non-proprietary data standard becomes unavoidable.

Regulators do not need to mandate this transition outright. Clear signalling around accepted market standards, particularly where reporting quality falls below peer levels, could be enough to accelerate adoption. Incentivised alignment may prove to be more powerful than prescriptive rulemaking.

The aim is a reporting model where firms report once and regulators can trust the data they receive, without relying on extensive reconciliation after submission. Representing trade events consistently and interpreting regulatory rules once, in code, would significantly improve both data quality and supervisory outcomes.

SFTR has demonstrated that the status quo for many firms when it comes to regulatory reporting is unsustainable. The opportunity now is to use the upcoming change to uproot existing complexity and to move regulatory reporting toward a model that is simpler, more efficient and fit for purpose. In other words, one that works better for firms, regulators and markets alike and is better suited to the digital age.

This article was first featured in Tabb Forum on the 16th February, see link here