The Committee on Payments and Market Infrastructures and the International Organisation of Securities Commission are advancing efforts to develop a global standard that would allow regulators to identify over-the-counter derivatives data reported to trade repositories.
As part of that effort, CPMI-IOSCO issued a second consultation paper on 18 August which focuses on developing a format for the unique product identifier ("UPI") code, and the content and granularity of the UPI data elements. CPMI is an arm of the Bank for International Settlements, representing international central bankers, and IOSCO is the main international body of national securities regulators.
This is a follow-up to the first consultation paper, released in December 2015, which proposed the harmonisation of global UPI with the intention of uniquely identifying OTC derivatives products required by regulators to be reported to trade repositories.
The UPI system assigns a code to each OTC derivative product by mapping to a set of data elements describing the product in a corresponding reference database. The reference database, previously known as a "classification system", was the focus of the first consultation paper.
CPMI-IOSCO's proposal was in response to the G20 OTC derivatives reforms, which require OTC derivative contracts to be reported to trade repositories to enable regulators to obtain a comprehensive view of the market and its activity.
Identify Content and Achieve Granularity
Kishore Ramakrishan, director, financial services consulting at PwC in Hong Kong, said the proposals in the second paper seek to introduce a practice in the cash equity market, through the use of codes to identify cash equity products, to the OTC derivatives market. It takes a step further and aims to identify the content and achieve a high level of detail in the data elements describing OTC derivatives products.
The UPI framework will allow asset classes, the base products underlying the asset classes and the sub-products underlying the asset classes to be properly identified, Ramakrishnan said. The framework also allows the underlying economics of the contract to be captured. Creating a standard identifying system will ensure consistency of data attributes with the identifiers, with the ultimate aim of harmonising the UPIs and ensuring that the main characteristics of the asset classes are captured.
The Detail is Important
Ramakrishnan said achieving a high level of detail in data elements is important for a number of reasons:
- it helps to ensure that derivatives products remain unified across their trade life cycle;
- price data is disseminated to the public domain; for executing orders and for conducting portfolio reconciliation; and
- allowing market participants to calculate the values for portfolio between them, among others.
Ramakrishnan said the UPI framework is made future proof against any upcoming requirements either from the industry or regulators' perspective.
Karel Engelen, senior director and co-head of data, reporting and FpML at the International Swaps and Derivatives Association ("ISDA"), said CPMI-IOSCO is seeking feedback on the main characteristics of the instruments and the representation of their underlying assets – also known as underliers.
Using an interest rate swap as an example, Engelen said CPMI-IOSCO would want to know what the asset class is, the instrument types, the notional schedule, whether it is in single currency or multiple currencies, whether it is fixed or floating, what the underlier ID source and underlier IDs (such as US dollar Libor) are, and what the underlying rate index tenor period and period multipliers are.
Engelen said the information that CPMI-IOSCO was after was detailed but still fairly high level.
"What CPMI-IOSCO is looking at in the consultation paper is whether the proposed level of granularity is correct and how to represent underliers," he said.
Format of UPIs
The level of detail that CPMI-IOSCO requires extends to the format on how the unique product identifiers are to be reported to regulators. Areas such as whether the code should be intelligent or non-intelligent and how long the code should be would also need to be considered, Engelen said.
CPMI-IOSCO has also sought feedback on what information should be used for the underliers. Engelen pointed out that considerations would need to be given to identifiers which are considered proprietary, which, he said, may not be appropriate from a regulator's perspective.
Other challenges stem from how best to implement UPIs alongside product identifiers required by the Markets in Financial Instruments Directive ("MiFID") and the European Securities and Markets Authority, Engelen said.
The second consultation paper will close on September 30 and CPMI-IOSCO expects to issue the final technical guidance on UPIs by end of this year. The Financial Stability Board's ("FSB") working group is studying the governance aspects of using UPIs, for which the recommendations have been slated to be released in 2017. Market participants expect the UPI framework and the guidance to be put in place in 2017.
Engelen said the FSB has pointed out that for trade reporting to be successful would require market participants to use unique trade identifiers ("UTIs") to uniquely identify each transaction and to use UPIs to help aggregating of information.