A fund manager executes an order for a swap contract with a broker-dealer counterparty on a swaps execution facility (SEF), then allocates the order to separate underlying funds and clears the trade through a clearinghouse using a futures commission merchant (FCM). At the end of this process, the fund manager might report the trade to an accredited swaps data repository.
It is likely that this single swap contract will be assigned different positional codes by the SEF, the FCM and the clearinghouse, or no code at all. To make things even more confusing, the data elements used to describe the exact same contract may differ or come from different databases that describe the same information in diverse ways.
At best, fund managers and custodians facing a mountain of manual work when it comes to pricing and reconciliations of data between FCMs and other post-trade service providers, say operations specialists. At worse, calculations of counterparty risk, investment risk, margin requirements, as well as portfolio valuations could turn out wrong. The reason: “The fund manager might accidentally think that a block trade with allocations to multiple underlying funds could be different contracts and miscalculate the notional value,” explains Sonia Goklani, president of Cleartrack, a consultancy in South Brunswick, NJ specializing in execution and clearing issues for derivatives. Such a miscalculation would naturally have a trickle-down effect to middle and back-office work.
Just what is a positional identifier? That’s what a division of the Washington,D.C. trade group Securities Industry and Financial Markets Association (SIFMA) is trying to specify now. As currently envisioned, it would sit in the spectrum of identifiers somewhere between a product identifier and a transaction identifier. “A positional level identifier is an ID code that would allow a person to value a notional of 1, regardless of the party executing the trade,” explains Elisa Nuottajarvi, staff manager of the Asset Managers Forum (AMF) of SIFMA in response to written questions posed by FinOps Report.
Defining the Identifier
Practically speaking, a positional identifier could identify the same specific swaps contract which a fund manager trades on multiple SEFs and many times over with multiple counterparties. The information used would help price for one notional value. By contrast, a product identifier explains the type of swap contract and some of its underlying details while a transaction identifier gives additional details of the specific trade executed. A legal entity identifier (LEI) identifies the counterparty to the trade.
Financial firms and regulators need standardized positional, product, transaction and entity identifiers to keep track of which financial organization has traded which contracts with which counterparty and the amount of the exposure involved. The Committee on Payments and Market Infrastructure (CPMI) and the International Organization of Securities Commissions ((IOSCO) are leading the charge to standardize product identifiers and recently called for the creation of standardized transaction identifiers, so that regulators can have a consistent view of the same trades.
“Currently, some clearinghouses generate positional IDs, while others do not. The IDs are of different lengths and even the ones existing today are not flowing through the infrastructure for cleared OTC swaps,” acknowledges Nuottajarvi. The goal of the AMF Positional Identifier Working Group of the AMF’s derivatives clearing committee is to issue a white paper early next year recommending the ID codes and the data elements which should flow between fund managers, swap execution facilities, clearinghouses, fund administrators and custodians and ultimately to a swap data repository.
Individual members of the AMF working group referred all of FinOps Report’s questions concerning their efforts to the webinar and SIFMA’s AMF. Nuottajarvi would not specify the data elements, but presentation materials from a recent informational webinar indicated that, depending on the type of swap contract, the points could include the maturity date, tenor, coupon and series. Such an array of information appears to go farther than that which would be referenced in a product identifier. The positional identifier would be used for FCM portability, clearinghouse portability, credit event management, pricing and valuation, reconciliations, corporate actions management, credit event management and regulatory reporting.
Nuottajarvi is eager to downplay any notion that the position identifiers are trying to fix a problem. The current system isn’t broken, she insists. Therefore, the AMF initiative is more about increasing operational efficiency and updating processes which will ultimately benefit end-investors. “The fact that there are multiple positional IDs for the same swap contract and not being used throughout the trade lifecycle has created operational challenges and additional manual processes for pricing and reconciliation of swap contracts,” explains Nuottajarvi.
Among the listed participants of the AMF working group are mega custodians State Street, BNY Mellon and Northern Trust well-known for offering middle-office services for fund managers investing in derivative contracts. Representatives from State Street, data giant Bloomberg and consultancy Sapient participated in the recent webinar.
As always, where there is necessity, competing service providers emerge. Bloomberg has been promoting its identification codes called Financial Instrument Global Identifiers, or FIGIs for short, to fill the gap. According to documentation on the AMF’s website early last year, CUSIP Global Services (CGS) was also approached by the AMF working group to participate in its activities, but it could not be determined whether North America’s numbering agency agreed to the AMF’s request. Based on its participation in the recent webinar, it appears that Bloomberg is taking the lead.
CGS declined to comment on its interactions with the AMF working group, other than through a statement issued to FinOps in which Matthew Bastian, director of market, business and product development for CGS, says that the US numbering agency has been expanding the reach of CUSIPs to new asset classes such as listed options, hedge funds and market agreed coupon swaps. “CGS will continue to work closely with its Board of Trustees and brethren members of the Association of National Numbering Agencies (ANNA) to explore CUSIP/ISIN identifiers for new asset classes, such as position identifiers for the OTC derivatives space,” he writes.
Bloomberg’s participation in the AMF working group wouldn’t be the first time the data giant has exerted its muscle in the financial instrument ID space through identifiers it has created through its open symbology initiative. As reported by FinOps, the data giant has recently tried to carve out a role for swap product identifiers in competition with the trade group International Derivatives and Swaps Association (ISDA) and ANNA, which is promoting its ISO-accredited International Securities Identification Numbers (ISINs) combined with an upgraded classification of financial instruments codes (CFIs).
Will Bloomberg win the battle, but lose the war of the hearts of financial market players which will ultimately use the positional IDS? Some swaps reporting and operations experts contacted by FinOps question the need to use FIGIs over CUSIPs, the US standard identification code for domestic transactions, and ISINs, the national code of most other major markets and the global standard for cross-border transactions. CGS simultaneously issues both CUSIPs and ISINs for all new financial instruments. The ISIN is one of a family of identification codes developed and managed under the auspices of the International Organization for Standards (ISO), and which are considered to be the industry standards for identification, trading, post-trade processing and regulatory reporting of trades.
Bloomberg developed FIGIs several years ago as part of updated proprietary data management scheme for its trading terminals. The data giant named the data architect trade group Object Management Group as the registration authority for FIGIs, although it appears that Bloomberg itself is the only issuer of FIGIs used for Bloomberg systems. Last fall, the OMG’s board voted to recognize the FIGI as a global instrument identifier.
During the information webinar, participants discussed a potential registration process for the positional identifiers in which swaps execution facilities would send transaction data to Bloomberg which then would issue the FIGIs. It appeared that Bloomberg is only waiting for a clear definition of the data points to be included to be ready to proceed with the plan. This mirrors ANNA’s position that it is prepared to rapidly extend the ISIN to the needs of the swaps industry. “The only thing delaying this process is our need for clear direction regarding the data points required for swaps processing and reporting,” says Dan Kuhnel, chairman of the ANNA board and director of primary markets relations/fixed income product development at Euroclear Bank Hong Kong.
Likewise, some regulatory reporting experts aren’t so enthused with the idea of FIGIs as the standard for positional identifiers. “If is it decided that an instrument identifier is required for OTC derivatives we would recommend this be coordinated through ANNA,” asserts David Nowell, director of regulatory compliance for Unavista, the London Stock Exchange Group’s transaction reporting arm. “National numbering agencies already assign the globally accepted ISINs for the identification of both exchange-traded instruments. With the strong push for harmonized global standards we would advocate the use of the existing ISIN standard and not try to reinvent the wheel by issuing a competing standard.”
Naturally, Bloomberg isn’t giving up without a fight. “The infrastructure Bloomberg has dedicated to the Open Symbology effort already supports the assignment and distribution of over 270 million FIGIs,” Richard Robinson, head of strategy and industry relations for Bloomberg’s open symbology group tells FinOps. “It is envisioned that through open and transparent work with the industry, the FIGI can be applied to the needs of the OTC derivatives community at large.”