Market participants won’t have to use two different codes to identify derivatives in regulatory reporting under the European Market Infrastructure Regulation (Emir), according to Joanna Lednicka, policy officer at the European Securities and Markets Authority (Esma).

Lednicka says the regulator is not in favor of requiring reporting counterparties to use both the unique product identifier (UPI) and the International Securities Identification Number (Isin) for over-the-counter (OTC) derivatives in their submissions to trade repositories under Emir. Either code would clearly identify an OTC product, she says, while “at the same time, this limits the burden to the industry by not requiring the provision of both Isin and UPI for the same products.”

The main purpose of the UPI, which is still under development, is to provide a means of identification for OTC bilateral derivatives. So far, it is expected to be used only for the instruments falling under the Emir scope that are not subject to the Markets in Financial Instruments Regulation (Mifir) reporting, which are the derivatives that are neither admitted to trading nor traded on a venue or via a systematic internalizer. This expectation will ensure that all derivative products reported under Emir are identified using an international standard—either UPI or Isin—or, in other words, that the same instrument will not be subject to both Isin and UPI requirements. 

UPI codes will be issued by the Derivatives Service Bureau (DSB), a subsidiary of the Association of National Numbering Agencies (Anna), from the third quarter of 2022. The UPI has been developed by a global initiative as a way of identifying OTC derivatives to enable global regulatory authorities to aggregate data on these transactions, and assess systemic risk.

Esma recently consulted on Mifir regulatory reporting and reference data requirements. In their responses to the consultation, many market participants expressed support for the creation of the UPI, but some were concerned that reporting a second code could lead to data quality issues, especially when used alongside the Isin.

Esma’s Lednicka says there was “major support” among market participants for the continuation of the use of Isin for those products that are already identified using the code.

“We think that in the future, either all or the majority of the UPI reference data elements should not be required to be reported separately to the trade repository. This can be facilitated through the use of flexible validation rules on which Esma has started working,” Lednicka says.

Esma has postponed the applicability date of the updated Emir validation rules from February 1 to March 8, 2021. These rules offer guidance on technical aspects of Emir, such as exactly what reference data needs to be reported to trade repositories.

Lednicka says that as well as the validation rules, Esma is working on guidelines for reporting, Q&As, and technical documentation to assist the industry in the implementation of the updated requirements under the Emir Refit—a set of amendments to Emir. “This guidance and documentation will also cover aspects related to the implementation of the international guidance, such as guidance on UPI, in the EU,” Lednicka says.

Data quality concerns

Some market participants said in their responses to the Mifir consultation that they would prefer to have one standard for reporting derivatives, and are worried that this policy decision would jeopardize data quality in reports.

ING Bank said it is in favor of harmonization of reporting requirements, and the use of available and internationally accepted standards, but that ING “would not be in favor of using Isins for some OTC derivatives transactions and UPIs for other OTC derivatives transactions and would expect one single, globally accepted product identifier for OTC derivatives.”

Similarly, Commerzbank said it doesn’t see a tangible benefit in switching from the Isin to the UPI, as the Isin has been adopted by Esma and is well established in Mifir reporting. The German bank said, “We feel that a potential use of the UPI as an alternative identifier for OTC derivatives will result in higher complexity and will result in considerable implementation efforts for all reporting entities.”

But as Lednicka says, that will not be the case, and the UPI will only be required where the Isin is not. 

“The challenge with the proposed approach is that firms would need to run two processes: one for the inclusion of UPI and one for Isin. Also, having an either-or scenario creates race conditions. On a global basis, we have generally found that the more complex the reporting requirements are made, the lower the data quality achieved,” Kirston Winters, IHS Markit’s managing director of the company’s OTC derivatives trades processing business, MarkitSERV, tells WatersTechnology.

“Isin and UPI are different standards, and it is unclear how UPIs will be derived from Isins, particularly without causing data quality issues. This is a concern we think should be addressed as a priority,” says Bloomberg’s Richard Young, head of regulatory and industry relations for global data at the company. 

Young also says he is concerned that the decision to mandate Isins means Emir reporting could “potentially diverge” from the standard international approach for OTC derivatives trade reporting, as the UPI was specifically designed for this purpose.

In 2016, Bloomberg’s own Open Symbology unit fielded a rival standard to the Isin, the Financial Instrument Global Identifier (FIGI). At the time, Esma was in the process of selecting an identifier for derivatives to use in Mifir, and ultimately chose the Isin.

The UPI fee model

The DSB, to which Esma gave the mandate to develop Isins for regulatory reporting and today generates and distributes the codes, now also has the sole mandate to distribute the UPI and operate the UPI reference data library. Since then, the body has been working on a governance and pricing model for the code, aiming to be able to distribute it to market participants by next year.

The first round of industry consultation on fee model principles opened on January 12, with a deadline of March 5 for industry feedback. The consultation will look at expectations around UPI adoption and the estimated number of users, the types of users, the use of workflows, and cost allocation processes.

Emma Kalliomaki, DSB’s managing director, is proposing that the code be charged for on a cost-recovery basis, using much the same model as the bureau uses to charge for the OTC Isin. “Essentially, it’s the cost of the service divided by the number of users,” Kalliomaki says.

Annual fees for the Isin are calculated using a model that applies ratios to users depending on the frequency of their use. So, for example, “standard” users and “power” users are assigned different variables and would be charged differently. The DSB says this ensures that users are charged fairly, according to their usage levels. 

Having already developed the Isin—and having weathered some controversy during that project—Kalliomaki says the DSB has the foundations in place to build the UPI. “We’re proposing to utilize the experience we’ve gained through the OTC Isin model to help us lay the foundations for UPI. This has been more than just with regard to the fee model, but also around the design and the development approach,” she says.

Like the Isin, the UPI will be a key identifier in regulatory reporting. The UPI is being developed by the Financial Stability Board (FSB) and the DSB to harmonize the data elements that are reported to trade repositories. The FSB says individual jurisdictions should implement the UPI in their own regulations by the third quarter of 2022. 

“The core purpose of the UPI is really to allow the global regulatory community to aggregate trade repository data, and then to be able to look at it holistically from a market abuse and systemic risk standpoint,” Kalliomaki says.