DSB says industry is ready to meet UPI mandate ahead of deadline

Early last week, the Derivatives Service Bureau (DSB)—the body in charge of two widely used over-the-counter derivative trade identifiers—released its assessment of industry readiness for the Unique Product Identifier, the first globally mandated OTC derivative identifier.

The EU is the second G20 jurisdiction to implement the UPI, following the US’ implementation in January. The requirement to use it is part of the EU’s European Market Infrastructure Regulation (Emir) Refit, which comes into effect on April 29, 2024. The UK will become the third jurisdiction to require the UPI later this year in September.

In its assessment, the DSB said that user onboarding data reveals that European organizations are prepared to meet their UPI regulatory demands. As of the data’s release, 246 firms had subscribed to the UPI service across various fee-paying user types, including 122 programmatic users, who will receive the identifier via API. Over 1,100 organizations are registered free users and will receive UPIs on an end-of-day T+1 basis. This represents an increase of more than 100 firms subscribing to the UPI service since the US compliance date.

The UPI has been in the making since the aftermath of the global financial crisis, when regulators around the world sought greater transparency for off-exchange derivatives. It follows the launch of the Legal Entity Identifier (LEI) in 2012 and the OTC International Securities Identification Number (OTC Isin) in 2017.

Can we say any one of those [changes to Emir] has really been a game-changer in terms of allowing us not to have to change our reporting so often or, indeed, given us better comfort in our regulatory reporting? No. But has it improved the data quality? Yes.

Regulatory expert at EU tier-1 bank

The EU, unlike other jurisdictions including the US, will require UPI reporting in addition to the OTC Isin for certain trades. The OTC Isin is still required for some regulatory reporting requirements in Emir and the Markets in Financial Instruments Regulation (Mifir). The DSB, which issues both identifiers, has said the two identifiers are complementary.

“When you have the Isin, you have the UPI by default,” says DSB managing director Emma Kalliomaki, who notes that while the UPI contains fewer data elements, the fields it does contain are also part of the OTC Isin database.

In January of this year, some in the industry raised concerns over the need to report both the UPI and the OTC Isin in the UK and EU in regard to the proposed EU consolidated tapes. Proponents of the dual-identifier approach say that without the older OTC Isin, certain regulatory oversight would be lost. Critics note that while the OTC Isin has served its purpose, the UPI is a simpler and updated version. For now, the EU and the UK will report the OTC Isin where Emir and Mifir overlap, and then report UPI where derivatives solely come under the scope of Emir.

While 1,100 subscribed users have selected the free option, the cheapest subscriptions place limits on the number of UPIs firms can create, with free users unable to create UPIs at all. Karan Kapoor, global head of regulatory solutions at consultancy Delta Capita, says some smaller firms found these “search only” licenses to be insufficient and have had to upgrade their licenses “with significant and unexpected fees charged.” He notes that “smaller firms trading bespoke OTC products have found they need licenses they were not expecting to need.”

To acquire the appropriate license—or the appropriate subscription tier—from the DSB, firms must estimate their trading and reporting volumes, a task that has presented some challenges. Banks make up 44% of the participants, while trade execution platforms, clearing houses, brokerages, trade repositories, and data management providers account for the rest. About 33% of the onboarded organizations are headquartered in the EU. The DSB says that as more organizations join the DSB service, the cost of the UPI service will decrease. The organization has termed this a “cost recovery model” and will provide quarterly updates on UPI user numbers via the Fee Model Variables page on its website.

Despite the cost recovery model, some have expressed skepticism toward the service, as changes to reporting obligations have added additional costs. One regulatory expert at a tier-1 bank located in the EU notes that Emir, the regulation that now requires UPI, has gone through eight “significant” changes since 2014.

“That is a very large number of changes that have cost a lot of money. Can we say any one of those has really been a game-changer in terms of allowing us not to have to change our reporting so often or, indeed, given us better comfort in our regulatory reporting? No. But has it improved the data quality? Yes.” Better reporting is good for both the regulator and the regulated, they say, but the value to the regulated may require a better pitch.

The DSB’s UPI service launched on October 16, 2023, after multiple years of conversation between industry stakeholders, global regulatory bodies, and the DSB. Since the UPI’s launch, first in a test environment and then in the US, more than 1 million UPIs have been generated.

“Identifiers are often the key to accessing data,” Kalliomaki says. “Data gives us so much knowledge and insight.” Identifiers, she notes, are critical for good quality data, ensuring trust in its provenance, lineage, and reliability.

The UK will be the next jurisdiction to require UPI reporting, starting on September 30, 2024. Australia and Singapore will require it starting October 21, and Japan will follow suit in April 2025. In Hong Kong, the Hong Kong Monetary Authority, and the Hong Kong Securities and Futures Commission are consulting on their own OTC derivatives reporting regime and have proposed mandatory UPI reporting to begin in September 2025.