March 13, 2017 / 12:59 PM / 8 months ago

DERIVATIVES-FSB consults on swap-identifier governance

LONDON, March 13 (IFR) - The Financial Stability Board has proposed a new framework for the governance of unique transaction identifiers that are used for reporting over-the-counter swaps to trade repositories.

Under new rules stemming from the 2009 G20 agreement, all OTC derivatives must be reported to registered trade repositories. With reporting requirements differing across jurisdictions, harmonisation of the codes used to identify trades and ongoing governance of UTI standards have become crucial in ensuring that regulators have access to a global view of risk in the US$544trn OTC derivatives market.

In its latest consultation, the FSB is seeking market feedback on which bodies should be responsible for a range of UTI oversight activities. That could include one or a combination of CPMI and IOSCO, regulatory authorities, the FSB, and international standardisation bodies.

At the heart of the debate is the quest for a balance between the decentralised nature of UTI generation and the pre-existing framework for legal entity identifiers, which feed into the UTI to pinpoint the generating entity.

The FSB proposes that oversight of UTI data standards and drafting of technical specifications could be undertaken by CPMI and IOSCO, which published technical guidance on the harmonisation of UTIs in February. The bodies could translate those data standards into necessary technical specifications, according to the FSB.

“As the drafters, the members of the CPMI and IOSCO best understand the purpose and policy considerations that support the UTI data standard and the rest of the UTI technical guidance, and would quickly recognise if and when the technical specifications diverge from its intended purpose,” the FSB said in its report.

The FSB notes, however, that development of technical specifications is not the primary skill set of CPMI, IOSCO or the FSB itself and would represent a move away from the LEI framework, where data specifications are drafted and governed by an international standardisation body.

An alternative would be to task an international body with the role, though governance structures of such bodies only allow for indirect or limited influence by authorities, something the FSB would like to see addressed before making such a recommendation.

“Involvement with the UTI data standard would have to be conditioned on regulatory authorities’ retaining control over regulatory and policy aspects of the UTI. The assumption that such an arrangement can be worked out with any international standardisation body is important to the FSB’s recommendation,” the regulator noted in its consultation.

The FSB also asked market participants to comment on whether the International Organization for Standardization (ISO) is a preferred candidate for maintaining UTI data standards, or whether there are viable alternatives.

ISO is widely viewed as a natural fit for the role as it is already performing a similar task for LEI data Standards. Despite the significant presence of ISO within the financial services community, not all regulators and authorities are members of the ISO or its committees.

Possible alternatives include the Object Management Group - an international, open membership, non-profit consortium that has been involved in a range of financial standardisation activities including the Financial Industry Business Ontology and the Financial Instrument Global Identifier.

The FSB proposes that responsibility for implementation of technical guidance, communication and education should lie with authorities given their supervisory and oversight powers that would enable coordination across all stakeholders.

“Because UTIs will be issued in a decentralised manner and because authorities have a greater degree of direct regulatory oversight over the generating entities and other stakeholders than any other entity, authorities are best positioned to perform this function,” said the FSB in its report.

UTI governance arrangements could, over time, diverge from criteria at inception, however, requiring governance arrangements to be adapted at a global level. The FSB notes that CPMI, IOSCO or the FSB itself may be best placed to take responsibility for ensuring that arrangements continue to fulfill the globally-agreed criteria.

The FSB proposes that maintenance of UTI technical guidance after initial publication is assigned to a body created or designated by the FSB, CPMI or IOSCO, though notes that technical guidance should not need a frequent review.

“A separate body, formed under the FSB, could be convened to meet, when and as needed, to consider updates to UTI technical guidance, including costs and benefits of such updates,” notes the FSB.

The regulatory body, chaired by Mark Carney, governor of the Bank of England, is seeking market feedback on a range of proposals and options in a consultation that closes on May 5, for final recommendations to be adopted by the FSB later this year. (Reporting by Helen Bartholomew)

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