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Questions Remain About Using ISINs as Instrument Identifiers for MiFID II and MiFIR

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By Chris Pickles, Co-Chair of FIX Trading Community’s Reference Data Subgroup and Member of the Bloomberg Open Symbology Team

The work of the Reference Data Subgroup of the FIX Trading Community starts again this week after the hiatus of waiting for the final recommendations of ESMA regarding Technical Specifications for MiFID II/MiFIR compliance. As these recommendations cover some 400 pages, extra time has been needed by participants in the subgroup to work through the documentation and identify relevant changes – and some of these changes are significant.

One of the key changes that is causing heads to be scratched is the requirement for using ISINs (International Securities Identification Numbers) to identify all financial instruments to be reported to regulators. ESMA’s original proposal for the use of AIIs (Alternative Instrument Identifiers) for exchange-traded derivatives has been removed altogether. The general reaction to this change has so far been positive. AIIs are not created using any international standard and were initially a response to MiFID I when it was recognised that ISINs had only been allocated to a few derivatives of different sorts. Also, the ISO 6166 standard of the time did not allow for the unique identification of the large volume of instruments represented by these derivatives.

In the meantime, the ISO 6166 standard for ISINs has been updated and considerable effort over the past 12 months has resulted in the allocation of ISINs to many more financial instruments, including derivatives. By the end of 2014, some 13 million financial instruments – mainly equities and fixed income instruments – had been allocated ISINs since the standard was created some 30 years ago. This year, that number has grown by around 18 million instruments, bringing the total number of ISINs allocated to around 31 million globally.

However, market participants are still questioning whether the ISIN allocation process is adequate to support investment firms in achieving compliance, both in terms of how many new identifiers will be needed and the speed of the allocation process. Firms are continually generating new instruments and need near real-time availability of new identifiers for those instruments. The ISIN allocation process involves separate national agencies allocating ISINs on a country-by-country basis, with a processing time that can take a couple of working days. This question is also being examined in other study groups, such as the recently announced ISDA/SIFMA working group on Unique Product Identifiers (UPIs) for OTC derivatives.

In parallel, at its May meeting in Toronto, ISO Technical Committee 68 Sub-Committee 4 (TC68/SC4), which is the ISO group that focuses on instrument identifiers and classifications, decided to create a new study group to examine the overall landscape of how financial instruments are identified. This study group will have its first meeting/international conference call this week, and has been tasked with reporting back to TC68 at its next annual meeting in April 2016. That will only leave investment firms with eight months before they have to comply with MiFID II/MiFIR and whether this work will have an impact on ISO standards will only be known after that date.

ESMA’s recommendations for technical specifications have left a safety net for investment firms in cases where they do not have ISINs for the instruments to be reported. In such cases, firms will be allowed to provide regulators with a defined set of data fields that describe the instrument in question. How this would work in terms of business process and in terms of effective regulation of markets is also causing investment firms to scratch their heads.

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