Data harmonization has always been a challenge in the OTC derivatives space, by nature these products require a high level of customization, in contrast to exchanged financial contracts that are standardized and fungible.

The lack of standardization in OTC derivatives products, heavily impacts financial institutions that are trying to navigate toward digitalization in order to smooth their operational and compliance costs.

These financial instruments can be tailored to each party's Needs. This implies for each contract a different set of attributes, maturity date, settlement type, underlying index, or even a different clearing method. These variables can impact the price and cause breaks in benchmarking, risk management, reconciliations or reporting. In short, the impossibility to comply with the most important rule infinance: "Apples to Apples."

The idea of a unique product identification logic for OTC Derivatives has emerged in parallel to the Dodd-Franck, ESMA or ASIC regulatory reporting requirements due to regulators efforts in increasing transparency and stability over OTC markets.

Over the last decade financial regulators often complained on the poor data quality reported by the industry within their regulatory reporting programs. Problems continue to include firms using different Classification of Financial Instruments (CFI) codes for the same products as well as inconsistent defining of notional, price and deliverable currencies.

The requirement for a Unique Product Identifier (UPI) has been brought to light lately by the CFTC for swaps recordkeeping and reporting rules, the regulator has recently set January 29, 2024 as the date for market participants to start reporting this new element to Swap Data Repositories for Credit, Interest Rates, Foreign Exchange and Equities swaps. The Commodities asset class has been deferred to a later phase due to its implementation complexity.

It's worth noting that this new UPI element will have to be reported for new transactions and will also have to be added to all existing open positions.

The ANNA Derivatives Service Bureau (ISIN, CFI, FISIN …) has been appointed as the UPI operator for this major market lift. They already issued technical specifications covering a large amount of products in order to classify their corresponding UPI based on asset class attributes, additionally they are planning to release a "ISIN to UPI" service to enable the ISIN conversion process for the upcoming EMIR REFIT planned for April 29th, 2024. ESMA HAS already informed the market it will be mandatory for their reporting regime.

In order to comply with these new requirements, Market participants will have to identify the different attributes required to classify each traded instrument within the new UPI taxonomy, in addition to reviewing all open positions reported for CFTC regime and updating their records accordingly.

The ANNA DSB UAT environment is expected to go live mid-April 2023, leaving firms 8 months for implementation and UPI's incorporation. However, they have already informed the industry that there will be discrepancies between UPI's generated in UAT and Production environment, leaving market participants only 3 months (Oct 16 2023 to Jan 29 2024) to assign "real" UPI's.

In addition, given its complexity, it's still unclear if ANNA DSB will be able to create UPI's in a timely manner, to comply with the CFTC Real Time reporting requirements.

And finally, how much will the UPI license cost?

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.