The initiative to develop a globally consistent standard for a derivatives product identifier has been rumbling on for a while now. This is something in which both the regulatory community and the industry have a big stake. Regulators want to be able to aggregate data in order to fulfill their mandate to monitor and assess risk – a uniform product identifier makes that a lot easier. The industry wants consistency in order to avoid a situation where multiple identifiers emerge for different purposes – a nightmare scenario where complexity would go through the roof and costs would rise.
So, everyone is agreed this is a good idea. The question is what standard should be used. The European Securities and Markets Authority (ESMA) has thrown its weight behind the ISIN, and has mandated its use for certain reporting obligations under the revised Markets in Financial Instruments Directive. Other regulators haven’t yet shown their hand. That’s because the Committee on Payments and Market Infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO) are working to finalize technical guidance on a common product identifier, which is expected before the end of the year.
That would appear to leave regulators with a stark choice: either CPMI-IOSCO recommends an ISIN-based identifier; or ESMA changes its approach to match the standards published by CPMI-IOSCO; or we’re left with a fragmented system of multiple identifiers.
There’s been a lot of discussion about whether and how ISINs can be used as a derivatives product identifier, and ISDA has played a full part in that. We’ve worked extensively with the International Organization for Standardization (ISO) and the Association of National Numbering Agencies (ANNA) to develop a multi-tiered ISIN framework for regulatory and business purposes, and have offered to provide the intellectual property associated with ISDA terminology and definitions free of charge to make this work.
We believe it’s possible for regulators and the industry to work together to agree a consensus approach that uses the ISIN. For that to succeed, however, it’s imperative that the identifier framework meets some key principles – and ISDA published a paper outlining those principles in May.
Among the most important is the need for open governance. Specifically, we think it’s crucial that derivatives market participants play an active part in development of the standard and its ongoing governance.
As it stands, ISINs can only be allocated by infrastructures approved by ANNA, and each one is the exclusive provider of ISINs in its local market. Given the absence of competition in selecting and designing the infrastructure, it’s important the governance framework reflects the views of market participants – the actual users of the ISIN – and not just those with a commercial interest in the infrastructure. Open governance is the only way to ensure the identifier works across jurisdictions and supports both regulatory and business purposes.
We would urge regulators to take advantage of the expertise and experience of the derivatives industry to ensure we have a single derivatives product identifier that suits regulators and the industry alike. It’s in all of our interests to make this work.