OTC ISINs: Few Users Pay Much More

Trading venues, banks, and broker-dealers now know for certain how much more they will have to pay to create International Securities Identification Numbers (ISINs) for over-the-counter derivatives. It turns out that it’s a lot more.

In a recent statement, the Derivatives Service Bureau (DSB) said that instead of a €65,000 annual fee, power users will have to pay €112,000. Instead of paying €22,000 standard users will have to pay €37,500. The power users and standard users, who already paid preliminary fees to  create OTC ISINs,  will receive an invoice for the difference from in February. They will have 30 days to pay their invoices.

Power users and standard users are two of the three categories of users of the DSB that pay fees  The other category is infrequent users whose fees have not been increased. They will still pay €3,000.  Power users users, typically trading venues and investment banks connecting with the DSB programmatically, can automate creation of  far more ISINs than standard users and get real-time updates of ISIN activity.  Standard users access the DSB through a web interface, but still can create substantial numers of ISINs. Small to mid-tier financial firms are likely infrequent users with more limited needs. Registered users, typically financial firms that only signed up to look up and download end-of-day ISINs, will pay nothing.

Why Pay More

The fee-increase news for power and standard users comes one month after the utility warned users they would likely have to pay additional fees, because of  fewer than expected users signing on for the first year. The new fees are based on the final number of  paying users as of January 5 and their category. The organization also  disclosed higher overhead costs to be recovered, now set at €9.2 million. The previous estimate was €8.8 million, when financing and contingency costs were added to the original €6million operations overhead.

The DSB didn’t provide any breakout of the the higher €9.2 million figure other than saying it reflected the “development and operating costs identified in Q4 2017 by regulatory imperative and industry requests.” Presumably the higher costs included further development of the DSB’s ToTV and uToTV services which help financial firms determine whether an OTC derivative meets the European Securities and Market Association’s requirement of being traded on a trading venue. OTC derivatives which meet that definition must be reported. The DSB postponed the launch of the ToTV from last month to incorporate ESMA’s new clarifications on the definition of ToTV.

Trading venues and financial firms have no choice, but to pay the higher fees. The DSB is the only organization that issues ISINs for OTC derivatives, which are required for trade reporting to comply with the second incarnation of the Markets in Financial Instruments Directive. In 2015, the European Securities and Markets Authority (ESMA) designated ISINs as the ID code reporting of all financial instruments, including OTC derivatives that were subject to regulatory reporting for the first time.  The need for near-real-time performance and potentially massive volumes prompted the Association of National Numbering Agencies to create a separate, automated global utility to allocate the identification codes, which can also be used for trading and post-trade processes.

Because the DSB  is required to operate on a cost-recovery basis, users have already pre-paid fees for the first 15 months of usage to provide operating funds. The preliminary invoice paid when they signed up was was based on the DSB’s projection of 100 power users and 100 standard users for its first year of operation. The actual number of users, as of January 5, were only 78 power users and 10 standard users .

Still, the recent figures represent increases from the previous December 7 tally of 66 power users and five standard users. Because power users pay three times more than standard users pay, the increase in the number of power users since December helped mitigate an even higher invoice.

The DSB did not say on whether the increase in power users came from more trading venues signing up or banks and broker-dealers. Trading venues have reportedly balked at signing up with the DSB because they suspected they would be bearing the brunt of the cost recovery fees.  As it has turned out, according to the DSB’s recent statement, investment banks — typically systematic internalizers — are paying 56 percent of the DSB’s overhead while trading venues represent 33 percent. Other industry sectors, including asset managers, are carrying 13 percent.

What now? DSB officials have previously suggested they will go back to the drawing board in 2018 to consider if  the costs recovery model could be configured more equitably. Although trading venues need more ISINs than banks and broker-dealers, they are paying far less of the DSB’s overhead costs. As of January 5, 32 trading venues were signed up compared with 56 investment banks. Each trading venue is charged a separate fee for each of its electronic platforms.

Although trading venues and financial firms might not have any trouble paying the final fee, regulatory reporting, data management and vendor procurement managers at banks and broker-dealers might be annoyed at having to scramble to adjust their market data budgets to the increased DSB fees.  It remains to be seen whether the DSB will be able to come up with a better pricing model for 2019.