Kaizen
Jonathan Lee
10 June 2025
Jonathan Lee, senior regulatory reporting specialist at Kaizen, speaks with Justin Lawson about ESMA's latest data quality report, which reveals significant shortcomings in SFT reporting and signals a new era of enhanced regulatory enforcement
Image: Jonathan Lee
ESMA's recent report delivers quite a stark message on SFTR data quality. What is your immediate takeaway?
The European 兔子先生and Markets Authority (ESMA) could not be clearer with its statement that 鈥渞eporting entities must increase the quality of their reported data significantly鈥�. The report confirms what many of us in the industry have suspected 鈥� despite the 兔子先生Financing Transactions Regulation (SFTR) being live for nearly five years, the data quality still has substantial room for improvement. What is encouraging is seeing the structured approach ESMA is now taking through the Data Quality Indicators (DQI) framework, which gives firms concrete metrics to measure themselves against.
Under SFTR, the reporting entity is usually the trading firm 鈥� both sell and buy side firms like banks, asset managers and insurers 鈥� even if reporting is delegated to a custodian or agent lender. Delegation does not shift responsibility. The firm remains fully accountable for the accuracy, completeness, and timeliness of data submitted on its behalf, regardless of who handles the reporting mechanics.
One issue lurking beneath these data quality concerns is the聽widespread use of delegated reporting. Many buy side firms rely on third-party agent lenders to generate and submit their SFTR reports. But this arrangement can create聽dangerous blind spots, especially if firms lack the capability to independently validate what is being reported on their behalf.
One interesting development in the report is the enhanced cooperation with BaFin. How significant is this?
This is actually a very positive development. Historically, we have seen somewhat uneven regulatory scrutiny across different EU jurisdictions, creating challenges for firms operating across multiple countries. The 'enhanced periodic engagement' between ESMA and the Federal Financial Supervisory Authority (BaFin) signals a more coordinated supervisory approach. BaFin stepping up their efforts suggests we are moving toward more consistent enforcement across the EU, which ultimately creates a more level playing field.
Let us talk about the Data Quality Indicators that ESMA has now fully implemented for SFTR. Which ones stand out to you?
The valuation metrics are particularly noteworthy. Missing valuations have improved dramatically 鈥� dropping from 26.3 per cent to 8.5 per cent over about 21 months 鈥� but that is still well above ESMA's five per cent threshold. Even more concerning are outdated valuations, which ESMA explicitly calls 鈥渢he worst among depicted DQIs鈥� at 26 per cent by December 2024.
What is telling about both these metrics is that ESMA attributes the improvement to 鈥渁melioration of reporting by a few of the major reporting entities鈥�. This suggests a concentration of responsibility among larger market participants, and those who have not addressed these issues yet will likely face increased scrutiny.
Why are those valuation metrics so important to regulators?
ESMA makes this crystal clear in the report when it says 鈥渉aving updated information in times of adverse market movements and crises is crucial for authorities鈥�. Remember, SFTR was born out of the 2008 financial crisis and concerns about the shadow banking system. Regulators need accurate, timely valuation data to monitor systemic risk effectively, especially during market stress. When over a quarter of valuations are outdated, that creates significant blind spots for supervisory monitoring.
The trade reporting discrepancies seem particularly high at 35 per cent. Should firms be concerned?
Absolutely. That 35 per cent mismatch rate between counterparty pairs is startling, especially when you consider that ESMA's threshold is just five per cent, and even the European Market Infrastructure Regulation (EMIR) 鈥� which has its own matching challenges 鈥� shows only 20.5 per cent.
What makes this particularly surprising is that many SFTR reports are single-sided, and even for dual-sided reports, we often see reporting delegated to one party with pre-matching and data enrichment from third-party providers. But delegation does not remove liability 鈥� buy side firms are still accountable for ensuring their reports are accurate, complete, and timely, regardless of who submits them. The current environment is making that accountability harder to ignore.
The report seems to focus heavily on securities lending 鈥� is that a concern?
At Kaizen, we would have liked to see more attention on repo transactions, given their greater systemic risk significance. 兔子先生lending is certainly important, but repos typically represent much larger values and are more closely tied to short-term funding markets that can transmit financial shocks. The focus on securities lending elements, particularly the historical issue with inflated market values for open-term securities loans, is valid but perhaps unbalanced.
Five years after implementation, are you optimistic about the future of SFTR reporting?
I am cautiously optimistic. The publication of the Data Quality Engagement Framework and specific DQIs provides greater regulatory certainty, which is always helpful for compliance teams. The coordinated approach between ESMA and national authorities is also promising.
However, I remain concerned about the industry's preoccupation with simple matching rates as a proxy for data quality 鈥� especially among firms who assume delegation covers their compliance responsibilities. It does not. We need a mindset shift where firms take ownership of their data, even when others report it on their behalf.
The report makes clear that ESMA's patience is running thin when it comes to data quality issues. Firms that have not prioritised their SFTR reporting infrastructure and controls need to do so immediately 鈥� or risk finding themselves the subject of those 'targeted efforts' regulators are now pursuing.
What should firms be doing now in response to this report?
First, firms should benchmark their own performance against these Data Quality Indicators. If you are falling short of ESMA's thresholds 鈥� particularly on valuations and trade matching 鈥� you need remediation plans in place immediately.
Second, review your internal controls around valuation updates. ESMA has made it abundantly clear that outdated valuations are unacceptable, especially for open positions.
Third, do not be lulled into a false sense of security just because you are below the thresholds. Perhaps most telling is Data Quality Indicator 11A - Anomalies. This uses statistical and machine learning techniques to flag values that deviate from market norms or best practice. While ESMA provides little detail on how this works, it effectively acts as a catch-all, designed to detect inconsistencies that may be incorrect, misleading, or paint a false picture of your firm鈥檚 positions. Just because your data passes validation rules does not mean it is accurate 鈥� and both ESMA and national competent authorities are watching closely.
Fourth, prepare for more direct regulatory engagement. The enhanced cooperation between ESMA and national competent authorities like BaFin indicates heightened scrutiny is coming. Firms with persistent data quality issues should expect more targeted supervisory action.
Finally, firms that delegate reporting should reassess their internal oversight arrangements. With ESMA signalling increased scrutiny, relying entirely on an agent lender or third-party vendor without proper reconciliation or validation mechanisms is no longer a tenable strategy. Regulators will hold the reporting entity accountable 鈥� not the delegate.
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