Have you heard? There’s a new identifier in town
Background
At the Pittsburgh Summit in 2009, the G20 leaders agreed that all over-the-counter (OTC) derivative transactions should be reported to trade repositories. A lack of transparency in these markets was a key problem identified by the financial crisis, and trade reporting provides authorities with data to identify and address financial stability risks from these markets.
To help authorities assess systemic risk and detect abuse within OTC derivative markets, they needed a way to silo and aggregate trade data across asset classes and products. A key preparatory step highlighted by the final report of the Financial Stability Board’s (FSB) Feasibility study on approaches to aggregate OTC derivatives data published in September 2014 was to harmonise the data elements across trade repositories. This would entail the creation of a Unique Product Identifier (UPI) and Unique Transaction Identifier (UTI) alongside the global introduction of a Legal Entity Identifier (LEI) (see Further Reading below).
What is wrong with the set of identifiers currently available?
The difficulty with some of the currently available identifiers is that you cannot aggregate them easily. Answering the question “What is the total notional value of European put options on Vodafone Group Plc in January 2024?” would be quite hard. On the 1st January a Vodafone put option with a strike of 50 GBp and a 3 month expiry would have a different ISIN to the same trade on 2nd January by virtue of the expiry moving by one day. As a result, it is not possible to aggregate by ISIN to answer this seemingly straightforward question without knowledge of every single January issued ISIN for Vodafone put options.
What were the next steps?
A lack of standardisation, limited transparency and operational inefficiencies drove the FSB to task The Committee on Payments and Market Infrastructures (CPMI) and International Organization Of Securities Commissions (IOSCO) with creating the framework and technical guidance for harmonisation of the UPI. Subsequently in 2019, the FSB designated the Derivatives Service Bureau (DSB) as both the service provider for the UPI system for OTC Derivatives and the operator of the UPI reference data library.
What is a UPI?
The UPI is used for identifying OTC Derivative products in Transaction Reporting data and to help assess systemic risk and detect market abuse, but what is it comprised of and how does it relate to the other identifiers?
The OTC Derivatives Identifier Framework from the DSB describes it best and has a number of useful examples for each asset class. There is a hierarchy of identifiers of increasing granularity which broadly associate to our Vodafone put option example as follows:
Classification of Financial Instruments – CFI (ISO 10962): Vanilla Cash-settled European Put Option on Equity Single Name
Unique Product Identifier – UPI (ISO 4914): Vanilla Cash-settled European Put Option on Equity Single Name Vodafone Plc (this has the UPI QZBKZ61LLNW9)
International Securities Identification Number – OTC ISIN (ISO 6166): Vanilla Cash-settled European Put Option on Equity Single Name Vodafone Plc with strike 50 GBp expiring 31st March 2024 settled in GBP.
Sourced from the DSB framework document linked above
For those familiar with the Skylight IPV instrument hierarchy, on initial inspection the UPI structure is extremely similar to our Submission Groups and should fit alongside fairly easily. It's always good to see we’re on the same wavelength as the regulators.
How does the system work?
Trading institutions will request a UPI from the DSB when they are reporting a trade to the appropriate platform. If a UPI for the traded structure already exists then that will be re-used. Otherwise a new one will be created and made available for the entire trading community.
What are the benefits?
Improved transparency: By providing a globally agreed standardised identifier, the UPI allows for easier tracking of trades, pricing, and market activity. This can enhance market integrity and investor confidence.
Enable data aggregation: With a common identifier, data from different sources can be readily combined and analysed, leading to better market insights and risk assessment.
Simplify regulatory reporting: The UPI can streamline reporting requirements for market participants and regulators, reducing administrative burden and improving compliance.
Enhanced efficiency: The UPI allows for efficient data sharing, aggregation, and analysis, streamlining operations and reducing costs.
Dynamic: It can be updated to reflect changes in the product's features.
When will it be implemented?
The launch of the UPI Service on 16th October 2023 was the first in a series of important dates for global regulatory reporting, including the start of UPI reporting on 29th January 2024 in the US, followed by the EU on 29th April 2024, UK on 30th September 2024, Australia and Singapore from October 2024 and Japan on 7th April 2025.
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CFTC Rewrite - 29th January 2024 |
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EMIR REFIT - 29th April 2024 |
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UK EMIR REFIT - 30th September 2024 |
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Rewrite from October 2024 |
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Rewrite - 7th April 2025 |
Skylight IPV and UPIs?
We are driven by the constant industry pressures our valuations clients face for greater efficiency and cost savings. We are already investigating how we can integrate the UPI mappings into our data. Internally it could provide greater efficiency when processing the transaction data we receive for our chart overlay and back-testing functions. For our clients, this could aid the mapping exercise between the Skylight and internal identifiers - thus increasing processing speeds. If we can compress multiple columns into one single identifier column then this will go some way to reducing data overheads.
While the UPI is in its final stages of development it is hard to say what is immediately achievable but we will ensure that we keep abreast of the latest developments.
Disclaimer
The material contained in this article is considered to be true and correct at the date of publication, but changes in circumstances after the time of publication may impact upon the accuracy of the material.
Update October 2024
EMIR Refit - With the deadline of 26th October 2024 fast approaching, some European derivatives counterparties are struggling to update reports of legacy trades in time to meet a new regulatory standard, according to multiple sources at banks and vendors. Firms unable to meet the deadline face the risk of closer regulatory scrutiny, or even fines.
Read more in the Risk.net article here.
References and further reading†
There is a wealth of information to be found on the DSB website and you may find these links useful:
*29th January 2024* DSB - https://www.anna-dsb.com/2024/01/26/the-cftc-sec-and-dsb-address-key-industry-questions-ahead-of-the-go-live-of-us-upi-regulatory-reporting/
DSB - https://cosp.anna-dsb.com/home#what-is-upi
FSB - https://www.fsb.org/2019/10/governance-arrangements-for-the-upi/
ISDA - https://www.isda.org/a/9uqgE/ISDA-Paper-on-Unique-Product-Identifiers.pdf
Regulatory Oversight Committee (ROC) - https://www.leiroc.org/leiroc_gls/index.htm
ROC UTI - https://www.leiroc.org/publications/gls/roc_20171229.pdf
ROC LEI - https://www.leiroc.org/leiroc_gls/index.htm
Blog - https://www.kaizenreporting.com/upi-unique-product-identifier-explained/
Blog - https://www.kaizenreporting.com/2024-guide-to-cftc-rewrite-unique-product-identifiers-upi/
Blog (ISINs for OTC Derivatives) - https://www.clarusft.com/mifid-ii-why-isins-for-otc-derivatives-are-bad-for-transparency/
† These links are being provided as a convenience and for informational purposes only; they do not constitute an endorsement or an approval by Skylight IPV of any of the products, services or opinions of the corporation or organisation or individual. Skylight IPV bears no responsibility for the accuracy, legality or content of the external site or for that of subsequent links. Contact the external site for answers to questions regarding its content.
Lee Davies