Since as early as 2014, regulators’ high expectations for a detailed product identifier for OTC derivatives have caused consternation amongst industry experts as retooling the current infrastructure to the new specifications is an enormous task that could result in hundreds of billions of numbers flying about the globe … if not managed properly.
We wait in hope for a unified and confirmed global view but, for now, here is the state of play in Europe, as we understand it from the practitioners in our working groups.
What has happened
With the challenges of tracking all these contracts during turbulent markets still fresh in the industry’s memory, several actors have called for a better solution.
There has been a lot of activity within the transaction reporting space with many moving parts from both the trade associations and the regulators.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO), who established the Unique Product Identifier (UPI) working group, issued a consultation paper over the summer, with final guidance expected later this year.
The International Swaps and Derivatives Association (ISDA) established a Symbiology initiative to create a methodology.
In parallel, ESMA looked at what identifiers are needed for MiFID II/R and the Benchmark Regulation. In particular, in their Final Report on technical advice under the Benchmarks Regulation, ESMA highlights that “in order to identify benchmarks in the context of MiFID II / MiFIR reporting framework and to enable automatic calculation, an ISIN code for the underlying of the financial instrument should be registered”. However, concerns have been raised on the difficulties market participants will face with the timely assignment of differentiated ISINs to differentiated derivative contracts. In light of this, ESMA has recommended that the European Commission request the assignment of ISINs to indices from administrators.
As these dialogues have taken place in parallel, there is not yet a unified answer across the globe but, in Europe, it has become increasingly clear that International Organization for Standardization (ISO)’s International Securities Identification Numbers (ISINs) are the preferred solution.
ISO, ANNA and the DSB
ISO TC 68, which oversees financial services standards globally, is the authoritative standards body for ISINs. The Association of National Numbering Agencies (ANNA) is the registration authority that has the responsibility of choosing the ISIN provider and ensuring that the system is implemented and governed appropriately.
ANNA announced in September 2016 that it plans to extend the functionality of the automated allocation engine, developed by ANNA with Etrading Software, for ISINs to identify OTC derivatives. This engine will support the FIX derivatives taxonomy as well as other open-standard product taxonomies.
One month later, ANNA published the ANNA Derivatives Service Bureau (DSB), which set up a timeline for the implementation of ISINs, with the final solution being completed by the end of 2017 – just before MiFID II goes into effect in January 2018. To help streamline the operations of the newly launched DSB, ANNA has hired a consulting firm to help. Amongst other things, this firm will help the DSB with the setup of a governance framework, revenue model and PMO, and will provide consultancy support to DSB stakeholders. This is no small project!
ANNA Derivative Service Bureau timeline
Q4 2016: Publication of the FIX open standard technical specifications to enable participants to connect their trading platforms to the allocation engine
Q4 2016: Public preview of the engine through a web interface to allow market participants to test and provide early feedback
Q1 2017: Technical access for formal industry testing of the engine
Q3 2017: Implementation of ISIN for OTC derivatives completed and engine ready to use
So, what is an ISIN and how does it fit in?
The goal of ISINs for OTC derivatives is to work towards making classification more granular and detailed, therefore making it easier to identify exact products. As shown in the graphic, the taxonomy starts off extremely general with only the asset class and product type given and becomes more detailed by using unique identifiers. The Unique Trade Identifier (UTI), which is required by ESMA for EMIR reporting, has the greatest granularity and gives the lowest number of transactions for any given item, thus appealing to the aim of ISINs – recognising the exact product.
Stay tuned for a more detailed piece with specifics on the structure and levels of ISINs, as well as the effects on MiFID transaction reporting. In addition, don’t forget to stay updated by following the discussion on our LinkedIn page.