Proposals to create a harmonised Unique Product Identifier (UPI), an alphanumeric code designed to help identify over-the-counter (OTC) derivative products, have been laid out by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO).
The CPMI-IOSCO consultative report – Harmonization of the UPI – is seeking industry comments around the viability of a global UPI, which would assist financial regulators in their efforts to effectively monitor derivative transactions reported to trade repositories. The UPI would consist of a product classification system and associated code.
This comes more than one year after the Financial Stability Board (FSB) urged industry associations to develop guidance around harmonising the data for OTC instruments reported to trade repositories or swap data repositories as mandated under the European Market Infrastructure Regulation (EMIR) and the Dodd-Frank Act respectively. A more effective process of aggregating reported OTC derivatives will enable trade repositories and regulatory bodies to have a better and comprehensive view of the OTC derivatives market and its activities.
Implementation
of EMIR has been haphazard. Unlike the rules laid out by the Commodity Futures
Trading Commission (CFTC) around derivative reporting which allows for
single-sided reporting, EMIR requires dual-sided reporting. Regulators in
Europe failed to give clarity around which counterparty to a derivative trade
develops the Unique Transaction Identifier (UTI), the alphanumeric code
designed to allow trade repositories to reconcile reported OTC transactions. As
such, both counterparties often developed UTIs, which were often not matching,
making it very difficult for trade repositories to reconcile the trades.
Much of the data being reported is of poor quality and industry experts have recommended that the European Securities and Markets Authority (ESMA) follow the CFTC’s example and allow for single sided reporting. Others have advocated that exchange traded derivatives be excused from EMIR’s reporting obligations as much of the necessary data sets are already available at trading venues or central counterparty clearing houses (CCPs).