12.27.2011
By Terry Flanagan

OTC Derivatives to be Tagged

Unique Product Identifiers to be attached to each instrument.

Efforts to create global standards for identifying financial entities and instruments are kicking in as regulators and industry groups seek ways to improve transparency in the OTC derivatives space.

The International Swaps and Derivatives Association (ISDA) has published draft taxonomies for credit, interest rate, commodity, foreign exchange (FX) and equity derivatives.

As part of ISDA’s ongoing efforts to improve the OTC derivatives infrastructure, ISDA developed an implementation plan in June 2011 to define a standardized taxonomy (classification) for OTC derivatives and develop Unique Product Identifiers (UPI).

The ISDA OTC Taxonomies and UPI will support regulatory mandates to increase transparency through public and regulatory reporting.

In addition to the coordination of the market discussions that led to the proposed taxonomies for the different asset classes, ISDA put a governance model in place to oversee the development of the taxonomies and ensure proper support going forward.

The final taxonomies will be included in the FpML data standard to facilitate the reporting process. Coordination with other international standards such as ISO to align with the ISDA taxonomies is ongoing.

As part of the initial definition stage, ISDA formed taxonomy working groups for each asset class.  The  taxonomy working groups reviewed existing product matrices, definitions and hierarchies to develop the  current proposed structure.

It is expected that the taxonomies will evolve over time as new products are created, others are standardized and additional feedback is received from regulators and market participants.

With the initial taxonomies completed, ISDA has engaged the FpML Standards Committee to integrate the work into the FpML standard. In addition discussions have started with ISO regarding an integration of the OTC taxonomies into, or convergence with, existing ISO classifications for the financial industry.

A joint report issued by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) recommends the creation of a system of Legal Entity Identifiers (LEIs), continued international consultation regarding implementation of LEIs, and international work to develop an international product classification system for OTC derivatives.

In addition, the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) have proposed analogous proposals for a universal, global reporting standard.

The CFTC proposes a universal, international standard consisting of three unique identifiers to facilitate data aggregation by regulators across counterparties, asset classes and transactions: a Unique Counterparty Identifier (UCI), a Unique Swap Identifier (USI) and a Unique Product Identifier (UPI).

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