In line with the recent regulatory driven study into derivatives instrument identification, the International Swaps and Derivatives Association (ISDA) has released proposals to link unique IDs to these instruments and has called for the establishment of a new central derivative product registry infrastructure. The proposals are contained in a recent white paper, which suggests that ISDA’s own Financial product Markup Language (FpML) standard could be used for data representation within the registry.
To set the proposals in context, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have recently published a paper outlining the findings of their joint study to examine the feasibility of adopting new algorithmic codes to identify complex and standardised derivatives. The findings indicate that the regulators believe current technology is capable of representing derivatives using a common set of computer readable descriptions and that these descriptions are precise enough to ID “at least a broad cross section of derivatives,” but a few other items such as standardised entity identification must be tackled first. And this is where ISDA’s proposals come into play.
The industry association contends that the central derivative product registry proposed in the white paper could maintain a reference data representation for standardised derivatives and issue product IDs for each of those derivatives. This reference data could then be provided back to the market by the registry as a centralised source for instrument IDs for these markets. The FpML data representation protocol could also be leveraged to provide the required “algorithmic codes” by creating XML documents for each of the distinct derivative products that are eligible for clearing and electronic execution through marketplace facilities, says ISDA.
“In addition to better support for regulatory reform initiatives such as price transparency reporting and reporting to data repositories, the proposal promises to simplify the trade processing and reporting architecture across the marketplace for standardised derivatives as market participants will be able to abstract the trade economics through reference data instead of having to specify them as part of each transaction,” says the association in a statement.
The CFTC and SEC study does, in fact, reference FpML along with the FIX Protocol as potential standards that could be used as building blocks in the derivatives identification process. However, some of the drawbacks it notes of FpML are its speed of transmission (compared to FIX) and the fact it does not currently comprehensively cover the derivatives markets overall (ditto with FIX). It will therefore be interesting to see the industry response (and that of FIX) to ISDA’s proposals.
With regards to regulatory communication, ISDA has proposed to “work with regulators in order to review the taxonomy developed through FpML over the past 10 years and enhance where needed”.
Much like the discussions surrounding the IDs to be used by the Office of Financial Research (OFR), ISDA favours a dummy ID for these instruments. “We favour a ‘non?intelligent’ product identifier, because experience demonstrates that ‘intelligent’ identifiers make inherent assumptions relating to the structure of underlying products, and to the set of attributes required for unique identification. These assumptions can be rendered invalid over time as the complexity of product offerings increases. This would be of particular concern in the derivatives space, which is characterised by a dynamic product innovation,” it states.
ISDA is also proposing a two tier data model to present these products, consisting: the product level, which captures “static” attributes; and the tradable instrument level, which incorporates more “dynamic” economic attributes. In terms of corporate actions, ISDA says: “How should the derivatives product registry handle corporate actions? One approach would be to have a versioning process, whereby a new version of product or tradable instrument is created each time there is a corporate action. Another approach would be to create a new product (or tradable instrument) altogether.”
The association is seeking industry input on the proposals by 6 May and interested parties should send comments to Karel Engelen, kengelen@isda.org. Comments will be posted on the ISDA website.
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