This week’s Commodity Futures Trading Commission (CFTC) public roundtable on the technical aspects of the introduction of new unique product identifiers (UPIs) highlighted the mountain still yet to climb in terms of setting instrument identification standards. Much recent progress has been made on the legal entity identification front as a result of the combined work of the industry and the Office of Financial Research (OFR), but the challenge of how to introduce new ID standards for instruments that are not currently covered by an identification system continues to prove problematic.
The goal of the CFTC roundtable discussions, which were led by director of the Division of Market Oversight Rick Shilts, was to garner industry input on the regulator’s UPI proposals. To this end, the UPI proposed by the CFTC in the swap data recordkeeping and reporting rulemaking (Part 45) would categorise swaps according to the underlying products referenced in them. While the UPI would be assigned to a particular level of the taxonomy of the asset class or sub-asset class in question, the CFTC and other regulators believe its existence would enable them to aggregate transactions at various taxonomy levels based on the type of product underlying the swap.
Shilts stressed the importance of the endeavour by indicating that without instrument identification standards and the establishment of new data infrastructure (such as data repositories), the Dodd Frank Act reforms will lack relevance. Data recordkeeping and reporting has been determined by the CFTC as a priority over recent years and its commissioners have certainly not been shy about vocalising their opinions on the subject.
The three panels during the roundtable event encompassed discussion about: the existing systems of swap product classification and identification and where the gaps lie; coordination among various industry product classification and identification workstreams for the purpose of achieving a universal method to describe and classify swap products; and the CFTC’s own proposals and requirements for these IDs. Other proposals touched on during the event included discussion about real-time public reporting of swap transaction data and on reporting, recordkeeping, and daily trading records requirements for swap dealers and major swap participants.
The first panel on existing systems of identification included participation from: the EDM Council’s managing director Mike Atkin; Karel Engelen, head of FpML at the International Swaps and Derivatives Association (ISDA); Jim Northey, co-chair of the FIX Protocol Americas regional committee and co-founder of LaSalle Technology Group; Eric Cohen, director at PricewaterhouseCoopers (which is working with the OFR); and XML expert and director and CTO at Londata Anthony Coates.
Panellists noted the significant gaps that currently exist in the identification system coverage of certain markets and instruments, including those that are of particular interest to the CFTC: swaps. However, there is a range of different approaches available to the industry in terms of introducing a new identification system to cover these instruments. Like the CFTC’s proposals, the IDs could be based on the underling instrument characteristics embedded within the contract. Alternatively, they could be defined by the relationships between the parties to the trade itself (counterparty data), or even by the transaction data.
The best route for regulators might also not be the best route for the industry noted panellists (a common concern over recent months with regards to legal entity IDs also). The challenge of retaining anonymity of parties to a trade was also highlighted as a concern, especially within markets that have a relatively limited number of participants and are traded OTC.
Panellists and attendees cited the integration challenge between the catalogue of current identification systems as another hurdle to overcome. Of course, by having ISDA and FIX Protocol around the same table, this process has already got off to a positive start, given that FpML and FIX are the two most widely used standards in the derivatives markets. To this end, a later panel also included participation from ISO chair and director of Citi Securities and Fund Services in New York Karla McKenna; another key stakeholder in the standards debate.
Although no concrete decisions were made, the roundtable event kicked off the work towards setting new instrument identification standards in earnest. After all, discussions and debate is a key enabler of reform. However, there is likely to be a long, hard climb ahead of the industry before it can reach the pinnacle of an instrument identification system to cover the majority of the instrument classes and markets out there.