Regulators and Industry Tackle Data Standards

Terry Flanagan

A joint regulatory-industry effort is underway to develop standards for describing financial instruments and entities. Under the auspices of the Commodity Futures Trading Commission’s Technology Advisory Committee, a subcommittee on data standardization has been created to develop identifiers that will aid in the collection, reporting and management of individual transactions.

FinReg established the Office of Financial Research (OFR), a division of the U.S. Treasury that’s charged with collecting data to support the Financial Stability Oversight Council.

The OFR is standardizing the manner in which parties to financial contracts are identified in the data it collects on behalf of the FSOC, including the Legal Entity Identifier (LEI) and institutional arrangements for issuing and maintaining identifiers and associated reference data.

“The LEI should be a great simplifier going forward and should require primarily short term challenges from a system integration standpoint,” Dani Newland, data management product manager at Eagle Investment Systems, a subsidiary of BNY Mellon that provides data management technology. “A lot will depend on how early market data vendors can get sample feeds and information out to the industry.”

Key data management challenges include how to resolve the identifiers currently in use with the new LEIs, how to handle the increase in overall information, from additional information on trades to keeping track of legal entities over time, and how to deal with historical data.

“Certainly, the data management solution in place should be able to maintain the information going forward,” said Newland. “While there will be some challenges associated with it, the LEI initiative’s benefits will far outweigh its costs.“

The CFTC data standardization project will encompass four areas: product and entity identification, machine-readable legal documents, semantic representation of financial instruments, and storage and retrieval of financial data.

“There is a need and desire to go beyond LEIs and lay the foundations for universal data terms to describe transactions, according to Andrei Kirilenko, chair of the CFTC data standardization subcommittee.

Regulators are weighing whether to require the derivatives industry to adopt standardized computer-readable algorithmic descriptions to describe both complex and standardized derivatives transactions.

According to a joint study released this year by the SEC and CFTC, the technology exists to algorithmically describe derivatives, that is, to make them machine-readable.

There are benefits to making computer-readable transaction descriptions legally binding, as has already been achieved with FpML in a number of areas of the derivative market place. These include eliminating the need to manually review paper confirmations, eliminating the need to store and retrieve paper confirmations, and providing a single electronic record as reference information in case of disagreement or dispute.

Despite the fact that it’s technically feasible to represent derivatives contracts in machine-readable format, several issues would need to be resolved before requiring standardized, agreed-upon computer descriptions for all derivatives: the absence of a universal entity identifier and product identifiers; the need for further analysis of the costs and benefits of electronic representation of all aspect of legal documents; and the lack of standard reference for financial terms not covered by existing definitions.

The main obstacles to quickly developing legally binding computer readable transaction descriptions have included difficulties in standardizing the legal definitions across dealers in some asset classes, and cost challenges in automating low volume and complex product areas.

To fully describe the legal framework of a transaction would require duplicating the master agreement information, which governs all derivatives transactions between two parties as well as the credit support annex, which governs the security and other credit support arrangements between two parties.

The subcommittee will provide recommendations on how and when standardized machine-readable legal documents can be created for most complex swaps, including ISDA master agreements and collateral documents, on how much machine-readable data can be standardized for regulatory oversight or delivery to swap data repositories, and on whether data on lifecycle events can be captured and analyzed by regulators.

The subcommittee will also consider approaches for integrating reporting to swap data repositories (SDRs) with real-time use and analysis of market data by market data participants and regulators.

Particularly for regulatory reporting and real-time reporting, standardization in the treatment of data in SDRs is deemed essential in meeting the goals of providing greater transparency in OTC markets.

FIXML (FIX Markup Language) and FpML (Financial products Markup Language) are protocols for sharing information on listed and OTC derivatives, respectively. However, they don’t represent all aspects of the contracts they’re used to describe, nor do they cover all types of derivatives.

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