LONDON, Dec 15 (IFR) - A new industry committee responsible for derivatives product identifiers has launched the first in a series of consultations as it eyes an April 2017 launch for testing an automated ISIN creation service for over-the-counter swaps.
The Product Committee of the Derivatives Service Bureau - the swaps arm of the Association of National Numbering Agencies - includes representatives from banks, buyside firms and trading venues. Nine committee members, who participate for a two-year term, comprise Citigroup, JP Morgan, Societe Generale, Allianz Global Investors, Fidelity, Goldman Sachs Asset Management, Bloomberg, Tradeweb and the InterContinental Exchange.
New pre and post-trade transparency rules under the second Markets in Financial Instruments Directive require certain OTC derivatives to be traded on regulated venues from January 2018. In draft regulatory technical standards issued in 2015, the European Securities and Markets Authority ruled that swaps must be categorised using ISINs to determine which products are subject to the requirements.
The DSB was created by ANNA - which serves as the registration authority for ISIN standards for bonds and exchange-traded derivatives - after publication of the RTS. The new committee will be responsible for product governance and have direct involvement in the creation and maintenance of data specifications for OTC swaps ISINs as well as addressing new products.
“Because of the global nature of derivative products, it made sense to create a brand new entity that provides the industry with the opportunity to build, from the ground up, a system that is fit for purpose and uses best-of-breed technology and processes to achieve that,” said Sassan Danesh, managing partner of Etrading Software - a management services partner of the DSB, which is also represented on the new committee.
The initial consultation is seeking industry comment on the key objectives and principles for generating identifiers. The consultation ends on December 30 for publication by the end of January.
Findings from an earlier DSB consultation on how participants will connect to the service and obtain ISINs, as well as the approach for on-boarding onto the user-acceptance testing platform, will be published on December 19.
Despite widespread calls for the creation of an industry governance committee to advise ANNA and encourage innovation, some participants have been disappointed by the limited membership of DSB’s product committee. Given the scale of the task and ambitious deadlines, many believe that a full industry dialogue is still required, which may not be achieved through a consultation process.
“There’s still a lot that needs to be resolved over the next two months and there hasn’t been a lot of discussion around some of the questions such as the treatment of structured products and package trades,” said Karel Engelen, co-head of data, reporting and FpML at ISDA. “There’s a lot still to do, particularly if there’s a commitment to a testing deadline at the end of the first quarter.”
Membership of the committee was limited to buyside, sellside and platform operators, leaving industry groups like ISDA - which spearheaded an initiative for product identification standards in 2015 and formed a symbology governance committee - on the sidelines of the debate.
Key questions still to be answered include the appropriate level of granularity for categorising OTC derivatives. According to the RTS, separate ISINs must be issued for every maturity date. That means 10-year interest rate swaps issued just one day apart will trade under different ISINs. In addition, negotiated fixed-leg prices in a swap trade are also treated as a data field, potentially leading almost every swap to trade with its own ISIN.
“The industry already has highly scalable systems to cope with high volumes of market data, which are much higher than the volumes of reference data that we’re talking about,” said Danesh.
“The inclusion of fixed price as a field is more problematic than maturity dates as there’s an almost continuous flow of ISINs from prices ticking up and down. If there’s too much granularity it becomes difficult to extract useful historic data.”
ISDA analysis shows that the approach delivered just 1.5 trades per ISIN over a three-month period, compared with 376 trades if those characteristics were removed.
Testing is scheduled to run for six months and DSB expects the service to be live for zero-touch ISIN creation on October 1 - three months ahead of MiFID II implementation. (Reporting by Helen Bartholomew; Editing by Ian Edmondson)