Another month, another MiFID-related reference data issue for practitioners to get their knickers in a twist about. As Reference Data Review went to press, several of our moles within the marketplace came to us to express their horror at the proposed Alternative Instrument Identifier (AII) for use in identifying derivatives in transaction reports. One source described the initiative using terms that are unfortunately not printable, though I expect you can guess the gist. Suffice it to say that, with the clock ticking on MiFID’s introduction, the people who will be responsible for making the new identification scheme actually work in practice are not amused.
Although the AII seems to have taken people by surprise, it has actually been in the works for some time. The letter that has brought the issue to a head comes from the Federation of European Securities Exchanges (FESE), and the initiative also has the backing of a range of other industry bodies including the European Banking Federation and the members of MiFID Connect. In the missive to CESR – dated September 7 – the FESE president Jukka Ruuska looks forward to final approval for the AII from the CESR chairs on September 13.
The justification for the creation of a new identifier is that ISINs – named as the standard code for use in identifying securities instruments in transaction reports under MiFID – are not suitable for identifying derivatives, a view with which CESR has agreed. Ruuska writes: “We firmly believe that, if ISINs were to be mandated for all equity and debt related derivative instruments by option series and futures settlement dates admitted to trading on EU regulated markets, the implementation of MiFID transaction reporting requirements would have been in disarray for the foreseeable future. This is due to the fundamental characteristics and costs of the ISIN allocation model that until now has not been used for anything remotely resembling the mandated ISIN proposal. If a solution had not been found, the allocation of ISINs to the hundreds of thousands of derivative instruments already existing across Europe would have created the need for an unprecedented reference data project that some members of our Coalition think borders on the impossible, would have been simply unachievable within the next 18 months, and would have led to an immense net cost for the banks, investment firms, exchanges and users.”
Strident stuff. And ironic that the aim has been to avoid an “unprecedented reference data project”, considering that our sources anticipate the AII will lead to just that. That irony aside though, no-one seems to be arguing with the assertion that ISINs are unsuitable for identifying derivatives. What they are arguing with is the need for a new identifier at all, simply to satisfy the requirement for each contract to be uniquely identifiable for the purposes of transaction reporting.
In practice, derivatives contracts are identifiable from existing attributes, they say. There is also a feeling that the way the AII is to be structured – basically from other existing pieces of information (exchange code, exchange product code, derivative type, put/call identifier, prompt date and strike price) – will make for a very long (too long for many existing systems) field and an entirely superfluous code.
All in all, our sources reckon the only winners from this will be exchanges and vendors making more money out of issuing and handling the data, and say the initiative smacks of an academic exercise paying scant regard to what is really going on within the banks. They also anticipate a fight back – so watch out for some activity from the working groups.