First published on Thomson Reuters Regulatory Intelligence on 23rd February 2024.
As UPI regulatory reporting goes live in U.S., there are opportunities for European OTC derivative markets
By Emma Kalliomaki, Managing Director, ANNA and the DSB
In 2014, in the aftermath of the 2008 financial crisis, the Financial Stability Board (FSB) proposed a globally harmonised Unique Product Identifier (UPI). Its purpose was to assist regulators in identifying the build-up of systemic risk in over-the-counter (OTC) derivatives.
Ten years later, and following a huge international effort from regulators, standards bodies, industry and the Derivatives Service Bureau (DSB), which issues the UPI, 2024 will see the realization of the G20’s UPI commitment.
On January 29, the United States became the first G20 jurisdiction to implement mandatory Unique Product Identifier reporting. Many firms are now gearing up for the second milestone on April 29, when UPI reporting starts in the European Union.
Below are insights from the DSB on the U.S. launch, as well as a look ahead to the start of EU reporting and the much-discussed question of scope.
U.S. UPI reporting now live
Since the Derivatives Service Bureau launched the UPI Service User Acceptance Testing (UAT) environment in April 2023, followed by the UPI Service production environment on October 16, 2023, industry preparation has gathered momentum.
With U.S. regulatory authorities playing a long-term and active role in the development of the UPI and its reporting requirements, the DSB hosted a virtual Q&A with the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) to answer industry questions on January 17. At this point, data showed that users were taking the necessary actions to meet compliance obligations.
A total of 131 organisations have fee-paying subscriptions, and 35% of onboarded organisations have headquarters in the United States. By the end of January, this figure had reached 40%, making the United States the jurisdiction represented by the most entities.
The number of UPIs created is another figure of perennial interest to DSB stakeholders. By the end of January 2024, users had created 225,000 UPIs, in addition to the approximately 700,000 UPIs created by the DSB using its own database. This has resulted in a cache of almost 1 million UPIs at the start of U.S. reporting.
With the DSB UAT environment enabling firms to test workflows, data integration options and downstream processes in advance of compliance dates, DSB data shows that users spend an average of two months in testing before shifting into production.
EU is next
On April 29, 2024, the EU EMIR Refit Regulations will come into effect, introducing a specific scope for UPI reporting alongside the existing use of ISIN for OTC derivative reporting. The ISIN, like the UPI, is an International Organisation for Standardisation (ISO) identifier issued by the DSB.
Questions about whether to report the ISIN or the UPI, and why the EU chose both identifiers, come up regularly. There is a definite rationale for the EU’s approach: cross-regulation consistency and lower reporting burdens for firms.
Today, the EU and UK use the ISIN in three sets of reporting rules: THE Markets in Financial Instruments Regulation (MiFIR) for both price transparency and market abuse detection purposes and under the EMIR to aggregate OTC derivatives data. European regulators decided to use the ISIN for EU regulatory reporting under MiFIR back in 2015, but knowing the UPI was on the horizon, the DSB worked with market participants, the ISO and EU/UK regulators to ensure the ISIN design was consistent and complementary with the UPI.
That means UPI data attributes and the UPI code itself are included in the ISIN record. If you have the ISIN, you have the UPI, ensuring global convergence and harmonisation.
The below table illustrates the complementary nature of the UPI and the ISIN. For each OTC derivative, the ISIN and UPI share the same attributes, with the ISIN having a couple of additional attributes as a more granular identifier.
The scope of OTC derivatives reporting under EMIR is wider than MiFIR. There is a group of OTC derivatives where neither they nor the underlier are traded on a trading venue, for which the ISIN is not required under MiFIR. Today, under EMIR, the Classification of Financial Instruments (CFI) code is used for this set of OTC derivatives. From April 2024, the UPI code will be used.
The table below provides a high-level summary of which identifier will be used in the EU for which OTC derivatives reporting requirement from April 2024.
The EU has leveraged the ISIN to limit firms’ changes to “pure” OTC derivatives where the UPI will be reported instead of the Classification of Financial Instruments code.
The ISIN for OTC derivatives provides an early example of a recommendation made by CPMI-IOSCO, the body asked by the FSB to develop global guidance on the UPI. “The UPI could be leveraged to define other more granular derivatives identifiers for other purposes,” CPMI-IOSCO said in its UPI Technical Guidance.
While the UPI was designed to help identify the build-up of systemic risk at a global level, some jurisdictions are exploring broader use cases for OTC derivative identifiers. There are likely to be further developments on this front as regulators leverage the benefits of global harmonisation and alignment.
From Europe to APAC
Other major jurisdictions also go UPI-live in 2024 and 2025, including the UK on September 30, 2024, Australia and Singapore from October 21, 2024, and Japan on April 7, 2025.
With firms needing to consider their integration, reporting workflows and downstream dependencies for implementation, the DSB encourages stakeholders to onboard in good time before their first reporting deadlines.
Information on the DSB’s Client Onboarding Support Platform, best practice guidance and a dedicated online support function that is available 24 hours, 6.5 days a week, can be found on the DSB website here.
More G20 jurisdictions are expected to announce their UPI rules in the coming months and the DSB is publishing links to consultations and rules on its website as they arise to assist industry navigate the different mandates.
DSB Industry Support
So with regulatory deadlines fast approaching, what steps should firms take?
Market participants need to review their workflows to understand how they will report the UPI to Trade Repositories, directly or otherwise. Participants will therefore need to obtain UPIs, and subsequently integrate the codes and the associated UPI reference data record into their internal and regulatory reporting workflows. The DSB’s UPI Service User Acceptance Testing, UAT, environment, which opened on 17 April 2023, allows prospective users to test connectivity and access options free of charge for 6 months from the date of entering it. The DSB encourages stakeholders to onboard and maximise the testing time available before their first reporting deadline falls due.
At the same time as launching the UAT, the DSB opened its Client Onboarding and Support Platform, COSP. The COSP is an online, self-service platform which allows users to manage their UPI subscriptions and connectivity options to search for and/or create UPIs. The DSB offers five main user types; two programmatic connectivity types, two manual connectivity types and the free Registered User option which allows firms to search the web-interface in real time for UPIs and download UPI files on a T+1 basis. Firms can test these different options in UAT, onboarding via the COSP, to determine which user type is most suited to their needs. The DSB will publish final fees for UPI use in September 2023.
The DSB Production environment will launch on 16 October 2023, three months before the first UPI compliance go live date, at which point users of the UPI Service will be able to create new UPIs in readiness for their reporting obligations.
The OTC ISIN and the Need for Complementary Standards
The UPI (ISO 4914) is part of the ISO framework which, together with the Classification of Financial Instruments, CFI, (ISO 10962) and OTC International Securities Identification Numbers, ISINs, (ISO 6166), form an identification hierarchy for OTC derivatives. The DSB issues the CFI, UPI and OTC ISIN for OTC derivatives, ensuring that they remain complementary whilst serving different purposes. The CFI attributes are a subset of the UPI attributes, and the UPI attributes are a subset of the OTC ISIN attributes. Put another way, an OTC ISIN will have only one UPI ‘parent’, but a UPI may have none, one or many OTC ISIN ‘children’.
In the EU and the UK, the OTC ISIN is used today for regulatory reporting purposes and has a role in the EU and UK EMIR Refit rules which, helpfully, are almost identical. Market participants will need to report either the UPI or the OTC ISIN to a Trade Repository depending, broadly speaking, on where the derivative or its underlier is traded. An important question for existing OTC ISIN users, therefore, is when they can start testing combined UPI and OTC ISIN data in UAT. The DSB opened the UAT environment for combined UPI and OTC ISIN data on 17 July 2023, 9 months before the EU’s mandate comes into effect.
To support users’ UPI integration, the DSB will also perform a ‘pre-population’ exercise, to attach the relevant ‘parent’ UPI code to existing OTC ISIN records, when the Production Environment is launched in October 2023. Consequently, some firms may be able to meet their UPI requirements through their existing OTC ISIN Service. However, it’s important to note that in such cases, firms will still be required to obtain an equivalent UPI agreement and contribute to the UPI cost recovery model through paying the appropriate UPI Service fee. This is linked to the principles of the DSB as an industry utility, operating on a cost recovery basis, with the UPI and OTC ISIN Services having separate cost recovery fee models. The principle is to ensure that the cost of each service is shared fairly among all users, irrespective of how they access the data.
This is the beginning, not the end
2024 is the starting point not the end: more G20 jurisdictions are expected to announce their UPI rules as part of the global drive to improve harmonisation and transparency into the OTC derivatives market. UPI implementation will help achieve these goals through standardisation and enhanced data quality. The DSB is proud to launch the UPI UAT Service as scheduled to help all stakeholders prepare for the upcoming regulatory requirements. UPI Product Templates, and a UPI User Guide and FAQ are readily available on the DSB website. Please follow the link: https://www.anna-dsb.com/upi/
