MIFID II: Wait for CPMI-IOSCO on Product Identifiers

Later this week, an industry workshop will convene in Washington, DC to discuss efforts to develop global, harmonised data standards for derivatives. This is an important – and welcome – initiative. Existing regulatory reporting regimes have been hampered by differences in reporting rules between jurisdictions, variations in reporting formats and a lack of global standards, making it tough to aggregate data across trade repositories and across borders.

The workshop, run by the Committee on Payments and Market Infrastructure (CPMI) and International Organization of Securities Commissions (IOSCO), will focus on three key topics, each covered by consultation papers issued last year: unique transaction identifiers, unique product identifiers and other data elements.

ISDA strongly supports this initiative. Agreement on common standards will be a major step on the path to harmonisation, and will improve the ability of supervisory authorities to aggregate data across trade repositories. It will also hopefully go some way towards reducing costs and complexity for reporting parties, particularly those that are subject to multiple reporting requirements.

ISDA has been contributing to this effort, and launched an industry wide Symbology project last year to develop a common product identifier for regulatory and reference data purposes. This initiative will incorporate the recommendations made by CPMI-IOSCO.

Despite this progress, the risk of fragmentation remains. In Europe, for example, the European Securities and Markets Authority (ESMA) has chosen ISINs as the sole identification standard under the revised Markets in Financial Instruments Directive and regulation (MIFID II/MIFIR). The final draft regulatory technical standards were published in September last year – after CPMI-IOSCO had begun its harmonisation initiative – and is currently being reviewed by the European Commission (EC).

The risk is that the MIFID II/MIFIR requirements may end up not reflecting the final global recommendations by CPMI-IOSCO. Certainly, there are a number of challenges associated with using ISINs in their current form for derivatives. ISINs work well for bonds, where an issuer can apply for an identifier in advance of issuance. In contrast, there isn’t an issuance process for derivatives: each contract is created through the act of trading and in response to client requests.

What’s more, each derivative can differ to suit the needs of the counterparties, with variability in everything from maturity to day-count convention. While a single bond with a single ISIN can be bought and sold by multiple participants, each derivative trade could theoretically require a unique ISIN to reflect the variability in terms. This means the number of ISINs required each day could run into the millions, way in excess of what is currently issued.

As it stands, ISINs can only be created by a network of national numbering agencies that are sole providers of the identifier in their local markets. Putting aside the lack of competition this creates, current turnaround times for new ISINs would need to be dramatically sped up in order to satisfy derivatives market practices.

ISDA is working with regulatory authorities, the International Organization for Standardization and the Association of National Numbering Agencies to consider how the ISIN could be modified to cater for derivatives.

Nonetheless, we believe it is important that European authorities allow the flexibility to incorporate the recommendations from CPMI-IOSCO within MIFID II/MIFIR, rather than tying themselves to ISINs now. (ISDA and the Global Financial Markets Association wrote a letter to the EC in December 2015, which outlined these issues.) Having different derivatives product identifiers for different purposes in different regions creates significant costs and complexity for users and market infrastructures, for little benefit. The optimal solution would be to use a product identifier solution that is global in application and consistent across jurisdictions.

Both regulators and market participants agree on the importance of global harmonisation. Real progress is being made by both CPMI-IOSCO in agreeing global standards for data, and by the industry through ISDA’s Symbology initiative. It would be a unfortunate if individual regulators go their own way now, when we’re so close to a common standard.