OTC Derivatives Identification Accelerates

Shanny Basar

The final stage of a demonstration platform for allocating product reference numbers to over-the-counter derivatives has been opened to the public this year to meet a new regulatory requirement in the European Union from 2018.

MiFID II, which comes into force in January nest year, requires the use of unique product identifiers for certain derivatives in the OTC market for the first time.

Sassan Danesh, management services partner at Etrading Software, told Markets Media: “The demonstration system had been opened up in stages from November. The final stage was opened on 3 January and 277 users have signed up.”

The automated system was developed by the Association of National Numbering Agencies (ANNA) with London-based Etrading Software. ANNA assigns a unique identification code to each new security as it is issued, leading to the global adoption the ISIN (International Securities Identification Number). However ISINs have traditionally been by issuers of new listed security issues, such as equities and bonds, and not for OTC derivatives.

The ANNA Derivatives Service Bureau was developed to provide ISIN numbers for the OTC market ahead of MiFID II  implementation. Although the use of ISIN numbers for OTC derivatives is only mandated by European regulators, the Derivatives Service Bureau will be the  first numbering agency designed to operate on a worldwide basis.

Danesh is also co-chair of the OTC products committee at the FIX Trading Community the non-profit body that develops and promotes the FIX family of standards, and was a member of the ISO study group that FIX participated in March last year to consult on rules for the allocation of the ISIN numbers to derivatives.

He said: “Formal user testing will start in April for the platform to go live in quarter three. We are accelerating the FIX connectivity tests to February.”

The allocation platform uses open-source architecture to allocate ISINs to new derivatives in less than a second and has been designed so that it can be used by the buyside as well as the sellside.

“There is no obligation on the buyside to use ISINs, only for ISIN trading venues or systematic internalizers,” added Danesh. “However there has been a lot of interest from the buyside as they have to process ISINs in their systems and meet the transaction reporting requirements.”

MiFID II extends transaction reporting obligations to the buyside for the first time, extends the reporting obligation beyond equities and requires reporting on an increased number of data fields.

Today the ANNA Derivatives Service Bureau opened a consultation on the proposed fee model that will be applied to the numbering agency functions on a cost-recovery basis.

Danesh added: “A reasonable certainty of revenue streams is required to give users certainty of user fees. Regulators wanted open data for all ISINs and their data attributes without license restrictions.”

He continued that ANNA Derivatives Service Bureau expects to issue two million ISINs a year for OTC derivatives, but if volume increases then per-unit costs will decrease cost as the service is completely automated.

Dan Kuhnel, chairman of the ANNA board of directors, said in a statement: “Evolving volume is expected to drive down the cost of ISINs for OTC derivatives to low single digits in Euros. In determining exactly how the cost-recovery pricing will be structured, we look forward to the feedback of the industry on our work to date.”

The consultation on the fee model closes on 6 February 2017.

“The consultation for the fee model is longer so there is more time to respond,” said Danesh. “We will publish the responses and decision at the end of February so the industry can see the pricing model before formal testing begins in April.”

Emma Wilson, management consultant at BCS Consulting, said in a blog last year that  ISINs for OTC derivatives are an exceptional development for the financial industry as it goes through significant change.

“A standardised identifier, distributed by a central body, will certainly allow the European Securities and Markets Authority to increase transparency of a traditionally murky market,” added Wilson. “However, the new product taxonomies, the increased volume of reference data and new systems to connect to will create additional burdens for investment firms that will already be under great pressure to deliver in time for January 2018.”

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