22nd February 2016

Over-the counter derivatives: implementing G20 commitments

Written by Sam Mannion, Policy Advisor, Capital Markets

At the 2009 G20 Pittsburg Summit, and in the immediate wake of the financial crisis, political leaders committed to requiring the mandatory clearing for all eligible over-the counter (OTC) derivatives, and the reporting of all OTC derivative transactions to trade repositories.

Nearly seven years on from the G20 commitment, and over two years since trade reporting in Europe became compulsory, significant challenges remain. Despite significant effort being expended by market participants, trade repositories and regulators alike, trade reporting continues to be characterised by poor intra-trade repository pairing and matching rates, inhibiting supervisors in their task of accurately managing systemic risk.

Whilst the reasons for these failures are complex, they can be attributed to mix of problems with the generation and use of Unique Trade Identifiers ((UTI) for reporting a contract), Unique Product Identifiers ((UPI) to uniquely identify products with a high level of specificity), and the Legal Entity Identifier ((LEI) which gives regulators a tool to measure systemic risk by identifying the parties to a transaction).

In the face of these challenges, the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions (CPMI-IOSCO) have been given the responsibility of creating unique identifiers that will facilitate more accurate and timely matching of trade reports.

With consultations on the UTI concluded last year, the BBA is now engaging with CPMI-IOSCO on their latest consultative report on the UPI. The development of the UPI will be split into addressing how derivatives products would be classified and how the code could effectively harmonise identification on a global scale.

As argued in our response, industry is supportive of a wide-ranging and highly granular product identifier, but there are issues which need to be addressed if the UPI is to effectively enable regulatory reporting of all OTC derivative instruments. For example, in the BBA’s response, we outlined the lack of a clear strategy to ensure that the UPI is harmonised on a global level, in a jurisdiction-agonistic manner that will ensure the UPI rules are used in the same way by all market participants.

Under MiFID, firms must report using ESMA International Securities Identification Numbers (ISINs), and the question of how the UPI will be harmonised in conjunction with this existing arrangement requires greater clarity. The BBA also identified concerns at a lack of a future-proofing strategy to cover changes in derivatives instruments, and recommended that additional data elements could be considered to ensure the UPI be as detailed as possible.

Overall, the developments are a positive step forward. Industry is supportive of a detailed set of identifiers that will help firms meet their reporting requirements, and while there is room for further development, the consultative report from CPMI-IOSCO is another encouraging step forward.

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