Unique Identitifier Codes - The jury is still out
On June 10, 2015 the Swaps Data Repositories (SDRs) of DTCC, ICE and CME collectively responded to the SEC’s Final Rule on Security-Based Swaps Reporting (SBSR). This collective response focused exclusively on the details of UIC’s (Unique Identity Codes).<1>
Then on July 20, 2015 ISDA presented a
public document on the fifth anniversary of the Dodd-Frank legislation, again
echoing the need to develop and adopt standardized product and transaction
identifiers, as well as reporting formats.<4>
These codes, properly implemented, have the
power to transform financial transaction flows, bring regulators in line with
their oversite mission, and permit the concept of straight-through-processing
to become a reality. Most importantly the issues surrounding UICs need to be
resolved quickly as billions of swaps transactions are sitting in SDRs with
ill-structured and poorly designed codes and data tags. Computers are unable to
access them in any uniform manner or aggregate them. It has left swaps regulators
blind to the contagion of systemic risk.
The SEC, CFTC and Office of Financial
Research asked in 2010 for such codes and passed the coordination of the first
code and its implementation to the G20’s Financial Stability Board (FSB), the
global standards body created in the aftermath of the financial crisis. The FSB
issued requirements for a series of unique, unambiguous and universal identity
codes starting with the legal entity identifier (LEI) for financial market
participants. They later took on the definition of contracts and instruments
(the unique product identifier – UPI), and transactions (the unique transaction
identifier – the UTI). With the use of these codes further drill down to codes
for desk, trader, and branch could be developed. These codes collectively are
referred to as UICs.
The LEI has been the first out of the gate.
They are being used in reporting swaps to 25 SDRs across the globe, including
three in the US. The issue of the LEI and the other principal UICs is that
billions of transactions are accumulating in these SDRs with attached LEIs,
UPIs and UTIs but there is no means to reconcile them nor aggregate them for
risk analysis.
That these codes are not unique,
unambiguous and universal is now well recognized. In their present forms they are
not fit for the FSB’s intended purpose of collecting information on all
financial transactions conducted by all financial market participants in all
financial products for use in systemic risk analysis. However, with current technology
demonstrating that data collection of financial transactions on such a massive
scale is possible<5>, the UICs become
the prerequisite pillars of this capability. Without them they will leave
regulators and industry far short of their goals for observing contagion building
up in the financial system.
The LEI initiative, with nearly 380,000 codes
issued to date for swaps participants, has only now acquired the capability to
reconcile duplicates and conform LEI registry data to a standard data format.
How many duplicates or improperly coded records will be uncovered using this
new capability is not yet known. Already 70,000 have been “lapsed” due to the
failure to ‘recertify’ them annually. Many of these were the result of being
issued prematurely and indiscriminately before final rules were promulgated by
the FSB.
This summer, a public consultation will be
conducted on how to establish the ultimate parent for each LEI, one of the
requirements for UICs for swaps data reporting. The public consultation will also
solicit interest in understanding how to provide hierarchies of ownership and
control of LEIs embedded in financial transactions for data aggregation.<6>
The LEI is obviously still a work in
progress. There are no assurances that given further enlightenment from the
consultation that LEIs will not be sent back to the drawing board. In effect
this is the request for all UICs made by the three US SDR’s and by the “Joint
Association” – to revisit the UICs structure and governance.
What has not been given a fair hearing to
date is that such a universal system of identification already exists – it is
found in the barcodes of commerce and in Internet naming protocols and coding
conventions. However, these two global coding conventions had been dismissed
earlier in discussions with industry trade associations’ as not a relevant
model for finance. The three SDRs and the Joint Association group are looking
for other solutions, mostly favorable to their existing operating models, while
the solution the regulators have been asking for, self-registration, is in
plain sight.
The model of self-registration is the model
used in the commercial barcode and the Internet’s coding conventions. However, regulators approved a host of data
intermediaries to insert themselves into what was intended to be both the
self-assigning and self-registering of codes by financial market participants
directly. In the case of the LEI these ‘third parties’ are assigning codes and
validating data using after-the-fact second or third level sources even though
a ‘second- eyes’ certifying agent at the originating source (such as an auditor
<7>) could be used.
The UTI is still intended to be
self-assigned by market participants but, unfortunately not yet with universal
definition nor an agreed upon code structure. It has not worked well in either
the US or the EU even though they are assigned by each financial market
participant (or their agent). Different reasons for their lack of conformity
surfaced regardless of whether UTIs were placed on each of the two sides of a
submission to SDRs required in the EU or on only one side as submitted to SDRs
in the US. The UTI has no universal definition and hence, multiple versions of
the UTIs are flowing into SDRs. The UPI with no universal definition is
likewise problematic.
The three SDRs in the US argue for holding
back on enforcing the UIC provisions in the SBSR rules for the reasons noted
above. They also note that the rule is difficult to implement in regard to who
corrects errors in the codes on the one sided submissions required by
regulators in presenting swaps transaction for posting in SDRs– the SDRs or the
market participants. Finally, the SEC has still to gain clarification on what
procedure must be followed to register a LEI by one legal entity through a
third-party agent for another legal entity that is part of a single organizational
structure<8>.
Finally, if we had started on this journey
by designing what the framers of the legislation had asked for -- common
reference identifiers for participants and products<9>
-- we could have extended such a common code structure to include all UICs such
as those constructed within a common framework in the successful implementation
of the barcodes of commerce<10>.
What now needs to be done, as is being requested
by the three US SDSRs and the Joint Association, is to pause and conduct a
comprehensive study on the entire range of required UICs to determine the best code
structure and governance framework that is fit for all their intended uses
globally. We may find that an integrated framework of code construction already
exists in commerce and on the Internet that can be applied to finance.
The problems that have arisen in the use of UICs in swaps data reporting should be considered a pilot or beta test, and taken as a needed pause for studying the issue on a more macro basis. Creating the Barcodes of Finance cannot be done through silos of markets, sovereign jurisdictions or regulators. This must be a global solution to a global issue.
<1> See DTCC Data Repository (US) LLC, et al “Comments on Proposed
Rule: Regulation SBSR - Reporting and Dissemination of Security-Based Swap
Information” at https://www.sec.gov/comments/s7-03-15/s70315.shtml
<2> “Risk, Data and the Barcodes of Finance” at http://ssrn.com/abstract=2544356
<3> Joint
Association letter “Key Principles to Improve Global Trade Reporting and Data
Harmonization” at http://www2.isda.org/attachment/NzY1OA==/Joint%20Trade%20Association%20Data%20Harmonization%20letter.pdf
<4> The Dodd-Frank Act: Five Years On, July, 2015 at http://www2.isda.org/attachment/NzcxMg==/Dodd-Frank%20Briefing%20Notes%20FINAL.pdf, page 10
<5> Final Report
on Global Identification Standards for Counterparties and Other Financial
Market Participants, March 10, 2015 at http://ssrn.com/abstract=2016874
pages 39-42
<6> www.LEIROC.org, “May 13”announcement
<7>“The Global Risk Regime – New Roles for Auditors”, April 21, 2015, http://ssrn.com/abstract=2508399
<8> Financial InterGroup Holdings Ltd, May 18, 2015 “Comments on
Proposed Rule: Regulation SBSR - Reporting and Dissemination of Security-Based
Swap Information” at https://www.sec.gov/comments/s7-03-15/s70315.shtml
<9> SEC, Regulation SBSR – Reporting and
Dissemination of Security-Based Swap Information, Federal Register / Vol. 75,
No. 231 / Thursday, December 2, 2010 / Proposed Rules, Dec. 10, 2010, http://www.sec.gov/rules/proposed/2010/34-63446.pdf, page 204
<10> Comments
by GS1 and Financial InterGroup to SEC on Regulation
SBSR—Reporting and Dissemination of Security-Based Swap Information, February 14
2011 at http://www.sec.gov/comments/s7-34-10/s73410-57.pdf, pages 14-26)
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