UPIs: powering the drive to improve data quality
05 September 2023
Paul Rennison of deltaconX asks how significant the introduction of the unique product identifier will be for those subject to regulatory reporting
Image: stock.adobe/Daniel Kraso?
The launch of UPI ignites a silent revolution
In the area of financial regulation, few changes have sparked as much transformative potential as the introduction of the unique product identifier (UPI). Its inauguration into a global set of regulation rewrites looks to support and enhance the effectiveness of the current classification of financial instruments (CFI) and international securities identification numbers (ISIN) frameworks.
Surprisingly, market feedback indicates that financial companies are underestimating the profound implications of these amendments, executed by the Association of National Numbering Agencies (ANNA) Derivatives Service Bureau (DSB), a critical institution collaborating with the regulatory arms of the Bank for International Settlements.
With all this in mind, to what extent is the UPI key to significantly improving future regulatory change, such as EMIR Refit?
Go-live
EMIR was introduced in the aftermath of the 2008 financial crisis to enhance transparency and mitigate risks in the over-the-counter (OTC) derivatives market. The go-live of the EMIR Refit next year will be the time when most European firms will first encounter the UPI.
As financial markets have evolved, so has the need for regulatory reform. In days gone by, matching rates of the registered trades and contracts did not reach the percentage to satisfy ESMA, in terms of data quality level. EMIR Refit emerged as a response to the ever-changing financial landscape. It introduced a series of measures to bolster market integrity and stability.
Headline-grabbing changes, in addition to the introduction of the UPI, included:
• Material extension of the data fields to be reported from about 120 to more than 200
• The use of the XML standard ISO 20022 as the new mandated reporting format
• The overhaul and strong improvement of the reconciliation process
• The strengthening of the clearing process between financial, non-financial and clearing house companies which redefined their duties and reporting obligations
UPI: a poster child for the next generation of regulations?
A central tenet of EMIR Refit's radical changes is the UPI — some would describe it as the lodestone of the drive to improve data quality. Previously, the lack of standardised product identifiers hindered data accuracy and market oversight.
However, with ANNA DSB at the forefront, the UPI framework brings uniformity and clarity to product identification. ANNA DSB will be the only source and, as such, the golden reference for UPI and OTC ISIN.
By providing each derivative contract with a unique and standardised UPI, ANNA DSB insists this will ensure seamless data reporting and regulatory oversight across jurisdictions. This new-found transparency empowers regulatory bodies to monitor systemic risks more effectively, promoting financial stability and investor protection.
What is the impact of introducing the UPI?
Financial companies often misinterpret the transformative impact of the EMIR Refit's UPI, CFI and ISIN changes. They view these revisions as mere administrative adjustments, and thereby fail to grasp their potential to revolutionise the financial industrial landscape.
The UPI, in particular, is a game-changer. It lays the groundwork for enhanced risk management and market transparency. Yet, many financial entities overlook the strategic value of this standardised identifier, neglecting the opportunities it presents for more efficient and compliant derivatives reporting. With its provision comes a 30+ extra data point reconciliation which helps to address myriad data quality issues around OTC contracts and products.
When integrated with other financial instrument classification tools such as CFI, ISIN, FISN, LEI and MIC, the UPI will provide a comprehensive system for consistent classification, reporting and monitoring of financial instruments. It should drive manifold potential benefits across the industry. These include:
• Standardisation: the advent of a UPI creates the potential for a harmonised framework for financial instruments. This standardisation paves the way for increased interoperability among financial firms worldwide, making cross-border transactions and reporting more streamlined.
• Enhanced risk management: there's now a clear picture of every financial instrument's attributes, which should lead to better risk assessments. As firms better understand the nature and characteristics of the derivatives they hold, they can make more informed decisions.
• Improved regulatory oversight: the challenge for regulators has always been accessing accurate data to monitor market activities. With UPI, and other enhanced reporting tools, regulatory bodies will be better equipped to keep tabs on market movements, ensuring that malicious activities or significant systemic risks are detected early.
• Operational efficiency: with standardised identifiers, the automation of many regulatory reporting tasks becomes possible. This should lead to reduced human errors and increased operational efficiency; processes that previously took hours, if not days, should be accomplished in real time or minutes.
• Transparency: market participants, from institutional investors to individual traders, will benefit from enhanced transparency. If they can better understand the instruments they invest in, they should be able to carry out more informed decisions.
• Cost efficiency: while there will be initial costs associated with a transition to the new system, the long-term benefits of standardised reporting will lead to cost savings. Fewer discrepancies and errors mean fewer financial and reputational risks, leading to potential savings in the long run.
• Cross-jurisdictional consistency: having a consistent identification system such as the UPI helps to create a unified approach toward regulation and oversight across different jurisdictions, particularly when considering the global nature of the OTC derivatives market.
• Increased trust: there is potential for financial systems to become more transparent and standardised, resulting in greater trust from participants. This could boost liquidity and lead to increased participation in the OTC derivatives market.
Market participants could experience heady gains from the introduction of this level of standardisation. However, and as always, it won’t be plain sailing. For those firms in the middle of their regulatory change process, and for those who have yet to start, deltaconX is here to help. The company has gained its experience from engaging with a wide variety of firms on both the buy- and sell-side.
Regulatory reporting isn’t going away; firms must recognise the immense potential of the coming regulatory reforms and wholeheartedly embrace them. By doing so, they will not only comply with regulatory mandates, but will also unlock new efficiencies and strategic advantages in an ever-changing financial ecosystem.
At a practical level, I will leave you with some thoughts and questions that may help your preparation:
• The UPI should be available from October 2023
• Only ANNA DSB can issue
• How will you source the UPI? Is the new process in place, as proposed by the ANNA DSB?
• Which licence profile of ANNA DSB will you need? There are seven different profiles to choose from
• Will you do this post-trade or into the source system?
• Is your source system vendor ready?
• Remember that all OTC trades, that currently have no ISIN, must be reported from 29 April 2024, with at least a valid UPI
• In its latest Q&As, ESMA indicated that it wants either an ISIN or an UPI to be reported until the UPI is established
The above list is obviously not exhaustive, but is the result of many conversations I have had on this topic. As always, firms will follow this new requirement in a way that matches their strategy or internal processes.
I wish you well. See you on the other side.
In the area of financial regulation, few changes have sparked as much transformative potential as the introduction of the unique product identifier (UPI). Its inauguration into a global set of regulation rewrites looks to support and enhance the effectiveness of the current classification of financial instruments (CFI) and international securities identification numbers (ISIN) frameworks.
Surprisingly, market feedback indicates that financial companies are underestimating the profound implications of these amendments, executed by the Association of National Numbering Agencies (ANNA) Derivatives Service Bureau (DSB), a critical institution collaborating with the regulatory arms of the Bank for International Settlements.
With all this in mind, to what extent is the UPI key to significantly improving future regulatory change, such as EMIR Refit?
Go-live
EMIR was introduced in the aftermath of the 2008 financial crisis to enhance transparency and mitigate risks in the over-the-counter (OTC) derivatives market. The go-live of the EMIR Refit next year will be the time when most European firms will first encounter the UPI.
As financial markets have evolved, so has the need for regulatory reform. In days gone by, matching rates of the registered trades and contracts did not reach the percentage to satisfy ESMA, in terms of data quality level. EMIR Refit emerged as a response to the ever-changing financial landscape. It introduced a series of measures to bolster market integrity and stability.
Headline-grabbing changes, in addition to the introduction of the UPI, included:
• Material extension of the data fields to be reported from about 120 to more than 200
• The use of the XML standard ISO 20022 as the new mandated reporting format
• The overhaul and strong improvement of the reconciliation process
• The strengthening of the clearing process between financial, non-financial and clearing house companies which redefined their duties and reporting obligations
UPI: a poster child for the next generation of regulations?
A central tenet of EMIR Refit's radical changes is the UPI — some would describe it as the lodestone of the drive to improve data quality. Previously, the lack of standardised product identifiers hindered data accuracy and market oversight.
However, with ANNA DSB at the forefront, the UPI framework brings uniformity and clarity to product identification. ANNA DSB will be the only source and, as such, the golden reference for UPI and OTC ISIN.
By providing each derivative contract with a unique and standardised UPI, ANNA DSB insists this will ensure seamless data reporting and regulatory oversight across jurisdictions. This new-found transparency empowers regulatory bodies to monitor systemic risks more effectively, promoting financial stability and investor protection.
What is the impact of introducing the UPI?
Financial companies often misinterpret the transformative impact of the EMIR Refit's UPI, CFI and ISIN changes. They view these revisions as mere administrative adjustments, and thereby fail to grasp their potential to revolutionise the financial industrial landscape.
The UPI, in particular, is a game-changer. It lays the groundwork for enhanced risk management and market transparency. Yet, many financial entities overlook the strategic value of this standardised identifier, neglecting the opportunities it presents for more efficient and compliant derivatives reporting. With its provision comes a 30+ extra data point reconciliation which helps to address myriad data quality issues around OTC contracts and products.
When integrated with other financial instrument classification tools such as CFI, ISIN, FISN, LEI and MIC, the UPI will provide a comprehensive system for consistent classification, reporting and monitoring of financial instruments. It should drive manifold potential benefits across the industry. These include:
• Standardisation: the advent of a UPI creates the potential for a harmonised framework for financial instruments. This standardisation paves the way for increased interoperability among financial firms worldwide, making cross-border transactions and reporting more streamlined.
• Enhanced risk management: there's now a clear picture of every financial instrument's attributes, which should lead to better risk assessments. As firms better understand the nature and characteristics of the derivatives they hold, they can make more informed decisions.
• Improved regulatory oversight: the challenge for regulators has always been accessing accurate data to monitor market activities. With UPI, and other enhanced reporting tools, regulatory bodies will be better equipped to keep tabs on market movements, ensuring that malicious activities or significant systemic risks are detected early.
• Operational efficiency: with standardised identifiers, the automation of many regulatory reporting tasks becomes possible. This should lead to reduced human errors and increased operational efficiency; processes that previously took hours, if not days, should be accomplished in real time or minutes.
• Transparency: market participants, from institutional investors to individual traders, will benefit from enhanced transparency. If they can better understand the instruments they invest in, they should be able to carry out more informed decisions.
• Cost efficiency: while there will be initial costs associated with a transition to the new system, the long-term benefits of standardised reporting will lead to cost savings. Fewer discrepancies and errors mean fewer financial and reputational risks, leading to potential savings in the long run.
• Cross-jurisdictional consistency: having a consistent identification system such as the UPI helps to create a unified approach toward regulation and oversight across different jurisdictions, particularly when considering the global nature of the OTC derivatives market.
• Increased trust: there is potential for financial systems to become more transparent and standardised, resulting in greater trust from participants. This could boost liquidity and lead to increased participation in the OTC derivatives market.
Market participants could experience heady gains from the introduction of this level of standardisation. However, and as always, it won’t be plain sailing. For those firms in the middle of their regulatory change process, and for those who have yet to start, deltaconX is here to help. The company has gained its experience from engaging with a wide variety of firms on both the buy- and sell-side.
Regulatory reporting isn’t going away; firms must recognise the immense potential of the coming regulatory reforms and wholeheartedly embrace them. By doing so, they will not only comply with regulatory mandates, but will also unlock new efficiencies and strategic advantages in an ever-changing financial ecosystem.
At a practical level, I will leave you with some thoughts and questions that may help your preparation:
• The UPI should be available from October 2023
• Only ANNA DSB can issue
• How will you source the UPI? Is the new process in place, as proposed by the ANNA DSB?
• Which licence profile of ANNA DSB will you need? There are seven different profiles to choose from
• Will you do this post-trade or into the source system?
• Is your source system vendor ready?
• Remember that all OTC trades, that currently have no ISIN, must be reported from 29 April 2024, with at least a valid UPI
• In its latest Q&As, ESMA indicated that it wants either an ISIN or an UPI to be reported until the UPI is established
The above list is obviously not exhaustive, but is the result of many conversations I have had on this topic. As always, firms will follow this new requirement in a way that matches their strategy or internal processes.
I wish you well. See you on the other side.
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