On October 16, 2023, the Derivatives Service Bureau (DSB) opens its production environment for creating and requesting unique product identifiers (UPIs), three months ahead of the first UPI reporting deadline. In a DerivSource commentary, Emma Kalliomaki, managing director, Derivatives Service Bureau explains why firms need to test and integrate their workflows early to ensure readiness for the compliance deadlines and how DSB is working to help with UPI creation.
Unique Product Identifiers (UPIs) were designed to help regulators understand global systemic risk in the OTC derivatives markets following the global financial crisis. The deadlines for reporting them are staggered around the world. The US will mandate the use of UPIs from January 29, 2024, and the EU will make UPI reporting mandatory as part of EMIR Refit from April 29, 2024. The UK will mandate the use of UPIs from September 30, 2024, and Australia, Singapore and Japan will follow. Many firms operate in multiple jurisdictions, so getting ready early is important and will help with their readiness for future compliance deadlines.
The DSB which provides reference data for derivatives, opened its user acceptance test (UAT) environment in April for firms to create UPIs from data related to a derivative’s underlying asset. There are currently around 400 unique entities registered in the testing environment, 145 of which are fee paying users. Many firms start with a free user account and later transition to a fee-paying user type to take advantage of more functionality and integration capabilities.
DSB has seen an increase in firms engaging with this issue, especially among US entities, which will be the first to be affected. EU and UK firms are also heavily involved and there is significant overlap in the requirements needed for these jurisdictions. The number of firms coming on board is a good indicator of the level of market readiness. But there is still more that can be done, and there is a lot of uncertainty because the UPI is completely new in all jurisdictions. Some firms have a certain level of integration because of prior identifier reporting requirements, while other firms must build from scratch. Switching from the UAT testing environment to a production environment will be the moment of truth for firms in terms of finding out their level of readiness.
Making the Switch from Testing to Production Environment
Firms cannot go into production until they have fulfilled the connectivity requirements and certification within UAT. There has been a somewhat slow uptake in terms of certification. It is not a particularly onerous process, so firms need to make sure they understand the process and the onboarding flow to make sure that happens. Certification is important to ensure that everyone who transitions into the production environment has the right security connectivity measures for it to be a safe and stable environment for everybody. Once certification is completed, moving over into production should be straightforward.
“Certification is important to ensure that everyone who transitions into the production environment has the right security connectivity measures for it to be a safe and stable environment for everybody.”
Firms will then start to ingest and integrate the data into their master data set, which they need to prepare for. UPI operates at a different level of granularity than other identifiers, providing specification at the product level. No other identifier sits in that space today when it comes to OTC derivatives. Within the DSB OTC framework, the Classification of Financial Instruments (CFI) offers high level classification, the UPI plus some additional data elements allow for global aggregation for monitoring systemic risk at the product level. Below that sit the OTC International Securities Identification numbers (ISIN), which are even more granular and are used for transaction reporting and market abuse monitoring.
Each identifier type has a different purpose, and there could potentially be multiple ISINs for a single UPI. From a data management point of view, firms must integrate the data appropriately to allow for a UPI to be represented against multiple ISIN records and at that different level of granularity. Firms need to consider how they manage that integration and make sure the different identifiers are used for different reporting purposes. They need to think about the outputs coming from the DSB, the input into the workflow, and ensuring the downstream processes and the reporting output is appropriate for the different jurisdictions. The whole data integration and data management piece will really start in earnest once they start receiving the production data.
The production environment will be available from October 16, 2023, and firms will be able to create or retrieve UPIs from day one.
“From a data management point of view, firms must integrate the data appropriately to allow for a UPI to be represented against multiple ISIN records and at that different level of granularity.”
DSB to Pre-Populate UPI Universe
At the same time, the DSB is attempting to pre-populate the UPI universe to make UPIs available earlier than if firms had to create them all from scratch. They are doing this based on the DSB OTC derivatives identification framework, and in consultation with industry groups looking at data elements, technology, and workflows. This will happen in parallel and will not cause any disruption to firms that want to focus on their own universe of securities. Whether the DSB does the pre-population based on ISINs, or a user requests a UPI, the UPI will be generated based on the common set of data elements. Users will always get a unique identifier if they put in the same set of data attributes.
DSB has performed extensive testing to understand the expected ratio of UPIs to ISINs and the time it will take to populate the universe, ensuring we maintain the stability of the platform in parallel to firms using it. Based on the analysis of test data, there will be roughly 110 million ISINs for 650,000 UPIs. After the initial universe of UPIs is generated, approximately 5,000 UPIs will be generated per month on an ongoing basis.
“There will be roughly 110 million ISINs for 650,000 UPIs. After the initial universe of UPIs is generated, approximately 5,000 UPIs will be generated per month on an ongoing basis.”
Not all firms will need 650,000 UPIs but that gives a sense of the scale of data ingestion and integration. Firms are still advised to focus on their own dataset rather than waiting for the pre-population exercise to be completed. DSB has displayed a pre-population pack on its website that shows the sequencing that will be used for the pre-population exercise. Active identifiers will be prioritised in the first stages of sequencing and inactive identifiers will be added later.
Firms Need a Strategic Approach to Data Management
Firms need to ensure they have the appropriate lead time and consider where they are in the process and when their compliance dates are, as well as what knowledge base they have. There is a high demand for skilled and knowledgeable staff to make sure all the work can be carried through all the staggered deadlines. Firms do not have the luxury of addressing this need in a piecemeal way, they need a strategic approach to managing this new data requirement.
“There is a high demand for skilled and knowledgeable staff to make sure all the work can be carried through all the staggered deadlines. Firms do not have the luxury of addressing this need in a piecemeal way, they need a strategic approach to managing this new data requirement.”
Firms need to take the time to consider how they want to manage UPI integration for the full breadth of compliance dates and jurisdiction. While there is some alignment and harmonisation, each jurisdiction has a different way of doing things, such as more focus on certain asset classes, or different workflows. The authorities will have different things in mind for their jurisdictions. The more lead time the better because unexpected issues take time to resolve and doing this close to the compliance deadline is too late.
Compliance is not a revenue generating area and is not where senior decision makers want to spend money. A strategic investment can hopefully mitigate costs by avoiding regulatory fines but that is not what managers see when they have to spend money on regulatory reporting. The more firms can bring benefit to the business with what they are implementing the better, which feeds into the strategic data management approach.
What are the efficiencies and cost savings they can bring by streamlining the way they look at data? How can they maximise the outputs for different reporting regimes to get a better result for the business? Looking at the aggregation capabilities, are there internal benefits for risk exposure to be had from implementing these standards and other aspects of the reporting regimes? This brings a better business case to a firm than just doing something because they must.
Next Steps for OTC derivatives firms
Firms need to get started with testing and integration as soon as they can. Testing is key—a firm will not understand its specific issues and workflow requirements until they are doing it themselves. They can hear what other firms are doing but until they overlay their workflows with the integration possibilities, they will not know what works for their firm.
When it comes to workflows, it is not only about integration with DSB for consuming the data, but also the internalisation and the downstream outputs that they need to understand, as well as the time that is required to do that. Connecting to the DSB and consuming the data is quite simple. But once they bring the data into their own systems and use it for various outputs it is important to know who they need to distribute it to, which data elements are required, and what timeliness they have to report.
Firms often do not realise how much work will be involved until they start, and unexpected issues can always arise that cause delays. It is important for firms to give themselves enough time to work through all the issues ahead of the compliance deadlines.
Related Reading:
See our UPIs article page
UPI Update: How is Implementation Progressing? – Derivsource
US Regulatory Roundup 2023: Swap Data Reporting and Digital Assets – Derivsource
