How FIGI Helps Track Swaps Lifecycles

The financial industry trades billions of dollars in notional amounts of swaps contracts daily, so it stands to reason that there should be an established methodology for identifying the contracts trading hands every day, especially as trading migrates to electronic venues or swap execution facilities (SEFs).

Unfortunately, this is not the case, as this seemingly simple and mundane problem rapidly becomes very complex. Identifiers exist to enable and facilitate processes and automation while preserving data quality throughout a transaction or instrument's lifecycle—across multiple systems and players. Achieving this is especially difficult in the swaps market. All of the individual data points must be maintained; otherwise the swap loses its integrity. And data must remain in sync between internal systems, as well as across the systems of clients, counterparties, custodians, trading venues, central counterparties and more.

"Tag and Classify" Falls Short

Traditional identification approaches struggle to address these challenges because they rely on traditional "tag and classify" methods and ignore the end-to-end lifecycle.

Data identifying swaps contracts is used in communications between firms, including trading, settlement, asset servicing, margining, pricing, risk, compliance and regulatory reporting. Depending on the function being performed, different data is required. Some relationships between instruments must be preserved and some of the associated data may be subject to change or revision without changing the actual financial instrument. Ensuring all records are updated correctly across all participants becomes a bigger hurdle.

A challenge specific to over-the-counter derivatives is creating a framework that unambiguously classifies a product and can also identify a singular financial instrument. With derivatives, multiple levels of aggregation can be contemplated, so the assignment of a product symbol must be driven by careful consideration of the intended use of the identification.

Multiple levels of product symbols are conceivable if distinct usages warrant them. Product classification-driven aggregation would be supported by metadata classification assigned to any product symbol. The goal is to enable processing through the lifecycle while preserving data quality. This is the approach that Bloomberg's Open Symbology uses in assigning the Financial Instrument Global Identifier (FIGI).

"Intelligent" identifiers that either concatenate individual data fields or compress and abbreviate data solve some issues but fall short on many fronts. These identifiers must be parsed to support automation, which can be inefficient and error-prone. Numbers will change as individual data changes, causing breaks when trying to compare and reconcile.

FIGI Reduces Complexity

This is where metadata comes into play. Using a semantically meaningless identifier removes multiple layers of complexity. Metadata enables completeness and permanence. There is an inherent mechanism for creating relationships between identifiers. By assigning a unique, non-changing, permanent identifier, and relating a set of metadata to it, a system can pull relevant information useful for actions such as offering human-readable descriptions. That provides instant translation between computers and human operators.

OTC products, once unique in each individual transaction executed, are being standardized. As they move onto SEFs and other electronic trading venues, they follow assets such as futures and options into more standardized workflows.

We need to agree on a simple and universal classification and identification methodology that best supports process automation, from regulatory analysis to pre-trade communication, on to managing margins, valuation events, and more.

The metadata-driven FIGI can handle these cases, and create a relationship between the executed swap and the original priced template. As market participants, standards bodies and regulators finalize decisions about identification hierarchies, Bloomberg, as the registration authority for the FIGI, will expand assignments in line with those findings, incorporating any classification recommendations.

If a swap is truly new, the FIGI will be generated, tagged with the associated metadata, and released for use. This process will vastly increase time to market, facilitate SEFs listing new products rapidly, and let regulators easily track various activities in the market. With the specialized expertise required to understand swaps and related products, there is a need for clear and transparent rules on assignments, validated by those experts.