In a recent DerivSource webinar, panelists from State Street, Bloomberg, Sapient Global Markets and the Securities in Financial Markets Association (SIFMA) discussed the growing need for standardization of position identifiers in the OTC derivatives industry, and the work that is being done to create and implement a new position ID symbology.
Since the global financial crisis in 2008, the OTC derivatives market has gone through a number of major changes with the introduction of central clearing, swap execution facilities (SEFs), non-bank Futures Commission Merchants (FCMs) and a raft of new regulatory reporting initiatives. These changes have happened in a relatively short space of time and have added complexity to the trading ecosystem. Operational trade support processes have been materially impacted and expanded as a result, and as the ecosystem has become more complex, the need has grown for a consistent data standard for managing trading positions across the cleared OTC derivatives trade lifecycle.
In the bilateral derivatives world, the trading ecosystem was fairly straightforward, with a trading partner, an executing broker, back-office support and a custodian. Today, there are between six and eight new clearinghouses and around 16 to 18 SEFs globally. There are around 10 futures FCMs as well as a number of regulatory reporting repositories. One of the biggest challenges that have arisen is a lack of consistency in the way all these counterparties identify and refer to the same positions. This leads to increased operational risk and means that asset managers and other buy-side firms are spending an inordinate amount of time manually reconciling positions between systems and across counterparties.
“There is a disconnect between an asset identifier that has been delivered to a custodian or back-office accounting agent, and the identifiers that are variant between the SEFs—what an FCM may call a position and how a CCP may refer to that same position. The key point being we have seen a breakage in terms of being able to ensure that all parties know the same assets,” says Michael Burg, derivatives product manager in State Street’s global product platform support group, and a prominent member of the SIFMA and the Derivatives Clearing Standardizations Working Group.
Standard Benefits All Participants and Entities
The Derivatives Clearing Standardizations Working Group, which is a part of SIFMA’s Asset Managers Forum (AMF), meets monthly and is in the process of developing a standardized position identifier that can be used by all parties within the cleared OTC derivatives life cycle from execution, to clearing and reporting.
According to working group members, all OTC derivatives industry participants would benefit from the introduction of a position ID. CCPs would see increased volumes, by decreasing operational risk and increasing efficiency for end users. SEFs would benefit in terms of easing the onboarding process and improving connectivity from a trade order management system to SEF downstream systems and to the various FCMs and the CCPs. Custodians would benefit by being able to both reconcile with FCMs on behalf of their clients and price an asset in a quick and efficient way, knowing that the asset they are talking about with their client base is the same asset. Asset managers would see a decrease in their operational risk. There would be increased transparency across the prime broker regime, and regulators would know how to better categorize similar positions from a risk perspective.
A global position ID would not only standardize the way all parties refer to the same assets and positions, but would also improve downstream reconciliation and pricing processes. For example, CCPs currently disseminate pricing in completely different ways. With a standard identifier, pricing could be disseminated once to a single utility. “If CCPs can get out of having to disseminate pricing to 35 different parties, and they can disseminate to one place, and people can pull that pricing for their NAV book and records,” it will make the pricing dissemination process much more efficient, says Burg.
Current IDs Insufficient
The industry is not completely without standard identifiers. Unique Product Identifiers (UPIs) define high-level product classifications, while Unique Trade Identifiers (UTIs) define a single trade. However, the existing product and trade IDs are insufficient, being at either too high or too low a level. “Neither of these identifiers corresponds to how risk is actually tracked for cleared products,” says Burg. What is lacking is an identifier that allows any party to price a notional of 1, and allows a sensible rollup of multiple trades of the same contract.
“Say, for example, Firm A wants to execute a block of trades that they will allocate to their sub accounts. That block can be allocated in 50 allocations. Those allocations would generate 50 UTIs, but would not ever translate into the same positional ID, when they are all essentially the same asset, and have some level of fungibility to the pricing aspects,” says Burg.
Furthermore, the positional IDs that do exist in the marketplace are too standalone. Each CCP offering netting services generates a positional identifier for risk and netted positions. But end users and asset managers have no way to link these CCP-specific position identifiers to the UTIs that were generated at trade execution. There is no consistency across the ecosystem, which creates operational risk and a lack of transparency, according to Burg.
Credit and Rates Tackled First
When work began on the development of position identifiers six months ago, the AMF working group decided to focus first on the more mature products and regions that had gone through the first wave of regulatory change. “We decided that the US and Europe would be our initial focus, and on the product side, rates and credit—given that they rolled out first—seemed to be the right place to start, says Kirk Friedenberger, Midwest business lead at Sapient Global Markets, and key SIFMA working group member.
Defining cleared credit products was a relatively simple task, according to Friedenberger, because the CCPs that clear these tend to have most of the volume. “The group tackled index, CDX, as well as single name products, looking at how trades are identified, what are the key elements and typical trade attributes, and delineating what is at the trade level versus what is at the position level,” says Friedenberger. The same approach was taken for rates, which are also fairly standard products with a large amount of volume. The goal was to break up what is required to identify a trade versus what is rolled up into a position. Once the working group had defined around 80 percent of credit and rates products, they began work on identifying the symbology.
Financial Instrument Global Identifier
The standard currently being reviewed for identifying positions for Interest Rates is called the Financial Instrument Global Identifier (FIGI). FIGI is a unique 12-character alphanumeric number, which serves as the key to a set of metadata describing the product. While the metadata is human readable, the identifier itself has no embedded intelligence, as its purpose is to assist with automation and straight-through processing (STP), according to Richard Robinson, manager, Open Symbology group at Bloomberg. The trademark FIGI is owned by data-standards body The Object Maintenance Group, while Bloomberg is the maintenance and registry authority for the FIGI standard.
The identifier is persistent, free for use and redistribution, and applies across asset classes. Because there is no intelligence in the number, it can be assigned as easily to an equity instrument as to an OTC derivative. The ID is currently assigned to over 278 million instruments across all asset classes. It is positioned to satisfy multiple context views and different needs across the trade and data life cycles, so the same unique identifier is used for trading, pricing, clearing, SEF activity and so on. This leads to better data quality and governance, Robinson says.
Implementation and Next Steps
While there is no formal timeline, the working group hopes to have ironed out the details regarding implementation by the end of the first quarter of 2016, according to Burg. At that point they would like to begin tackling the industry-wide onboarding exercise and global rollout. “We want to engage with all of the major global exchanges—knowing that the clearing rules and mandates are at various points in their lifecycle, but the earlier we strike into those areas the better off we will be as a global ID provider,” says Burg.
Robinson stresses that widespread industry participation, from regulators and industry alike, will be essential in order for this initiative to be successful. Input is still needed from buy-side firms, SEFs, clearinghouses, custodians and vendors globally—everyone across the trade life cycle and in all regions, to make sure that everybody’s needs are captured and built in to the new standard.
How to get involved?
Buy-side firms and other industry participants that are interested in getting involved should contact Elisa Nuottajarvi, staff advisor, SIFMA Asset Managers Forum on enuottajarvi@sifma.org
Learn more about Position Identifiers
DerivSource and the AMF have collaborated to provide an on demand webinar explaining the position identifiers initiative. Watch this video here. If you have questions you can submit them directly via the video player via the question window or email DerivSource (julia@derivsource.com) or the AMF (see Elisa’s email above).
