The new Derivatives Service Bureau (DSB) which will allocate ISINs for over-the-counter derivatives, appears to think so. It also thinks that it might be the organization issuing the UPIs, although it is willing to work with others.
If such a scenario were to come to pass, trading firms and other users of the DSB wouldn’t have to build new connectivity to the UPI issuer. Nor would they have too many adjustments to make to their middle and back-office systems.
“If the UPI implementation were performed by the DSB, then the DSB will be able to auto-generate the associated UPI for every OTC-ISIN in existence without any additional implementation effort by the industry,” writes Sassan Danesh, managing partner for Etrading Software in an entry posted on Linkedin on October 8. The London-based Etrading Software serves as the DSB’s technical and management partner.
Danesh’s if is a big if. Competing alternatives are likely to make their case to regulators who have not indicated when a decision will be made. Danesh’s post follows a new white paper jointly issued by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions (CPMI-IOSCO) outlining their proposed technical specifications for UPIs.
The Financial Stability Board (FSB) has separately published a document on proposed governance of the UPI, requesting comment on how the entity issuing the UPIs should be operated and governed. As a successor to the Financial Stability Forum, the FSB in Basel makes recommendations about the global financial system. Feedback to the FSB’s document is due by November 17.
Why does Danesh think the ISIN is the best candidate to ultimately become the foundation of the UPI? “This is possible because the OTC-ISIN already contains the information required to create a UPI as a parent in the instrument hierarchy,” he writes.
Even if the DSB doesn’t end up being the entity issuing the UPIs, it could still play a role helping out users of UPIs. Utilizing its established connectivity to interact with the UPI issuing entity on behalf of end-users, the DSB could distribute them onward to the DSB’s users, says Danesh. He would not specify alternative entities. However, based on the questions posed by the FSB in its request for comment, it stands to reason that national numbering agencies could locally issue the UPIs with the DSB serving as the distributor and aggregator.
Launched earlier this month, the DSB is the first automated global numbering agency and is responsible for issuing ISINs for over-the-counter derivatives to meet the transaction reporting requirements of the second incarnation of the Markets in Financial Instruments Directive (MIFID II) and other EU regulations. National numbering agencies issue local identification codes and ISINs for equities, debt and other exchange-traded instruments. Funded by a cost-recovery model, the DSB will charge more active traders of OTC derivatives higher fees for ISIN allocations than infrequent ones. In a press release issued in November 2016, the DSB said that its platform relies on open-source Corda and Handle.Net software, which allows it to more easily add storage capabilities and adapt the structure of the ISINs.
In one sense, unique product identifiers and ISINs fulfill the same goal — to identify financial instruments. However, they are designed for different purposes. As explained by CPMI-IOSCO in its recently published technical guidance, the UPI represents a specific set of reference data elements for regulators to consistently aggregate and analyze transaction data on OTC derivatives reported across multiple trade repositories. Mitigating systemic risk is the main goal. The OTC-ISIN is comprised of a larger set of reference data, adding up to unique derivative profiles for broader regulatory oversight and controls. For financial industry participants, the ISIN also supports standardized operational records.
The question of whether OTC-ISINs are currently fit for purpose as the basis of global UPIs was also raised at a webinar about ISINs co-hosted on September 20 by North American numbering agency CUSIP Global Services and FIMA. “The DSB solution has been tailored to meet the requirement of MiFID II, and the DSB did not have an extraordinary amount of time to prepare,” said Robin Doyle, managing director of the office of regulatory affairs for JP Morgan Chase. The DSB had only one year to design, built, industry-test and go live to meet EU regulatory deadlines. MiFID is effective in January 2018.
“The industry envisioned a UPI solution that would have a hierarchy with varying levels of product attribute granularity, and we are still hopeful that will happen going forward,” added Doyle. The levels of product attribute granularity would range from the most basic details of the financial instrument, through a medium level with more details to a third level with the most granular number of attributes. The relationship between the levels of granularity would be captured in a parent-child-like hierarchy structure, according to Doyle who previously served as the co-convenor of the study group organized under auspices of the International Organization for Standardization (ISO) to expand the coverage of the ISIN to include OTC derivatives.
In his LinkedIn post, Danesh provides of a chart of how that hierarchy could look, with the highest and least granular level being the UPI. “CPMI-IOSCO’s definition of a product is less detailed than the ISIN definition of a financial instrument,” he tells FinOps Report. Because the UPI data does not include the maturity term or expiry date, an entire swap curve would be represented by only one UPI. The ISIN for OTC derivatives, on the other hand, does include an expiry date in its reference data. “The outcome of this difference is that a single UPI might well cover multiple OTC-ISINs,” he says.
Filling the Gaps
In his LinkedIn post, Danesh also shows charts of several OTC derivative types, highlighting the minor gaps between ISINs and UPIs. For interest rate swaps, interest rate swaptions and FRAs, the OTC-ISIN reference data provides 100 percent coverage of all of the UPI data attributes. However for interest rate swaps there is a 98 percent coverage of the enumerations across all of the data attributes. When it comes to interest rate swaptions, 95 percent of the coverage of all the enumerations exist. For FRAs, the percentage of coverage of all the enumerations falls to 90 percent.
Who will fill in the gaps? “There is a new ISO Study Group looking at gaps in the CFI that need to be addressed to ensure consistency with the UPI. The DSB is an active participant of this SG,” Danesh tells FinOps Report in response to e-mailed questions. “All of the elements in my analysis on LinkedIn that can be addressed by the CFI are expected to be addressed within the ISO SG.”
The Classification of Financial Instruments (CFI) is another ISO standard code that is generated at the same time as the ISIN. The CFI describes only the type of instrument without identifying the trading parties. The entity information, which is part of the larger data set of OTC-ISINs, would come into the play with another reporting standard under development by CPMI-ISOSCO called the unique transaction identifier (UTI).
Unlike the European Securities and Markets Association (ESMA), which requires the use of ISINs to identify of all financial instruments, including OTC derivatives, for EU regulatory reporting, CPMI-IOSCO has not endorsed a specific identifier standard. However, the new ISO SG’s involvement with UPIs makes it more likely that ISINs would be favored to meet any regulatory requirement for UPIs.
It remains to be seen how much of a role the swaps dealers themselves will play in carving out an expanded role for ISINs. Karl Engelen, senior director of the International Swaps and Derivatives Association (ISDA), the trade group representing the world’s largest OTC derivatives traders, won’t say whether the ISDA would be working with the DSB to help close the gals between the ISIN for OTC derivatives and the UPI. Nor would he say whether ISDA will endorse the DSB as the issuing body for UPIs.
“CPMI-IOSCO has just published the final technical specifications for the UPI, so ISDA needs to spend more time evaluating, based on the required level of granularity specified, what the infrastructure requirement will be,” Engelen tells FinOps. “The FSB is not asking at this point about who should be the issuer of UPIs. It is asking about criteria such as cost recovery and fee models that should apply to any UPI provider.”
Engelen says that ISDA will provide the FSB with input on the pros and cons of relying on a single UPI provider versus multiple providers. In doing so, ISDA will address the benefits and costs on an asset-class basis for leveraging existing providers versus using new infrastructures. Considering that ISDA has previously criticized the DSB’s governance structure for being heavily dominated by national numbering agencies, the trade group could easily argue that the industry should play a greater role in overseeing any organization issuing UPIs.
Data giant Bloomberg, which has continued to tout its FIGI identification codes as superior to ISINs for OTC derivatives, is playing it close to the vest when it comes to how it will address the CPMI-IOSCO UPI specifications or the FSB’s request for comment. “We continue to work with the industry and regulators through the processes and procedures they have created,” says Richard Robinson, industry relations and open symbology strategy executive at Bloomberg in a statement to FinOps. “We would like to ensure that the technical and governance requirements are sound prior to the selection of any solution and that any UPI will be truly free and open and have proper governance.”