RegTech Intelligence

Making ISINs work for MiFID II transaction reporting


In our preceding article about ISINs, we explored the pursuit of a universal OTC identifier, and discussed what has occurred in Europe to fix this gap in the financial industry.  The Association of National Numbering Agencies (ANNA) created the ANNA Derivatives Service Bureau, which is based on an automated ISIN allocation engine and is scheduled to be up and running by the end of 2017 – just in time for MiFID II enactment.  In this article, we delve into the structure and levels of ISINs and how these will affect the future of transaction reporting.

What does an ISIN look like?

The ISIN structure is defined by the ISO 6166 standard.  The code itself is a 12-character alphanumerical code, and it is not an ‘intelligent key’, meaning that the number is not decipherable by humans.  The ISIN begins with a two-digit country code, followed by 9 characters, and ends with a check digit in order to recognise the exact product and to identify a security for trading and settlement purposes.  Some of these securities include bonds, commercial paper, equities and warrants.  Additionally, they may be used to aid in processes such as portfolio management and investor relations.  Furthermore, the concept of ‘fungibility’ is included, which means an instrument traded on another venue may have a different price but, when settled, it has the same characteristics, and thus will have the same ISIN.

ISIN coverage has expanded to include more types of instruments over the decades, but no ISIN has ever been constructed with the complexity, variability or granularity of ISINs for OTC derivatives.  These have a pyramid structure related in which the top level is the code, the intermediate level is the descriptive reference data and the bottom level is the underliers or reference assets.  This structure relates only to ISINs for OTC derivatives and not ISINs in general.

What this means for MiFID transaction reporting

ESMA issued the RTS document that established the ISIN as the identification standard for all instruments.  MiFIR RTS 22-23 and ITS ESMA contain the standards for transaction reporting to competent authorities.  The standards require the reporting of transactions on instruments that are traded, or can be traded, on a venue or for which the underlier is traded on a venue.  Venues are regulated markets, but also include multilateral trading facilities or other trading facilities, so this reporting would bring into scope a large number of OTC derivatives.  The three scenarios below detail whether or not the ISIN is necessary for transaction reporting.

Scenario 1: If the financial instrument (including OTC derivatives) can be traded on a venue, it must be reported using the ISIN, and only the ISIN.

Scenario 2: If the financial instrument itself does not trade on a venue, but the underlier does, the instrument would not have an ISIN and, instead, a list of fields or attributes would need to be completed, which include maturity date, fixed price and strike.

Scenario 3: If the financial instrument itself trades on a venue that is not recognised by ESMA, the instrument could have an ISIN and reports would need to include both the ISIN and a list of fields.

As of 7 November 2016, ANNA has announced access to the ANNA DSB Demo website, enabling users to interact with the ISIN engine through a preview version – the DSB, which is currently under development.  Using this demo, users will be able to create new ISINs, search for existing identifiers, download ISIN data files and see examples of their ISINs, once live.

This is good news for the derivatives industry as it will have the information necessary to address implementation and start testing of the engine in their 2017 budgets and eventually to comply with MiFID II standards in January 2018.  Even better news is the fact that ANNA has already published the connectivity specifications, which show firms how to integrate the DSB engine with their front-office systems.  We’re well on the road to ISIN implementation.

However, the path to ISIN implementation could have some potentially tricky political issues.  There is a question of whether ANNA or the derivatives industry should oversee the data utility for OTC derivatives, leading to demands for more transparency, specifically regarding ANNA’s governance plans for the DSB.  This situation is complicated for ANNA, considering their contract with ISO to ensure that all numbering agencies (including the DSB) operate according to ISO’s business and technical rules.  And the work is not for the fainthearted – industry experts fear billions of these new identifiers will emerge next year.

Other potential issues include unknown pricing, the yet-to-be-decided commercial framework and actually meeting the deadline.  While these are all valid concerns, it would appear that we have little choice.  European law now mandates that we make it work!

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