They don’t have much time to spare. The Association of National Numbering Agencies (ANNA) wants prompt feedback on its proposals for the nitty-gritty data content, operational and IT details surrounding its new ANNA Derivatives Service Bureau (DSB). Comments on the first consultation paper issued on data specifications are due by January 4 and those for the second paper on technical specifications are due by January 13.
The quick pace is essential to meet the January 2018 implementation of the second incarnation of the Markets in Financial Instruments Directive (MiFID II). The legislation requires financial firms to provide their regulatory agencies with full information about each transaction they execute with International Securities Identification Numbers (ISINs). That includes reporting of certain OTC derivatives, not previously covered by ISINs. The ISINs were endorsed as the preferred reporting standard by the pan-European securities watchdog European Securities and Markets Authority in 2015.
Over the past few weeks, fund managers, banks and broker-dealers have been allowed to try out creating ISINs for OTC derivatives from the online demo site for the DSB. Regulators were given first crack, followed by broker-dealers and banks and ultimately fund managers. As of February 1, 2017, users of the DSB will be able to test their connectivity to the DSB’s demo site using the Financial Information Exchange (FIX) message protocol.
“The timeframe was designed to be two months ahead of the formal UAT period beginning on April 1, allowing firms more time to adjust their back offices,” says Sassan Danesh, director of London-based eTrading Software, ANNA’s technical partner and manager of the DSB. Details on how to connect to the demo will be sent to firms by January 24. Onboarding for the formal UAT will begin in early April. The DSB will sequence the onboarding process on a first-come first serve basis, but give priority to firms required to provide ISINs in their regulatory reports.
ESMA’s endorsement of ISINs led to the creation of a study group to work out the details of how ISINs — typically used for equities and fixed-income instruments — could be adapted for OTC derivatives, which are mostly swap contracts. The FIX protocol, popular in trade execution, was selected as the message format for automated connectivity to the DSB while FpML taxonomy would be used to describe the data elements. Other identifying codes — Classification of Financial Instruments (CFIs) and Financial Instruments Short Names (FISNs) — will also be issued alongside ISINs.
The members of ANNA opted to create an entirely new infrastructure – a fully automated derivatives service bureau with near-realtime response — to allocate ISINs for OTC derivatives, instead of giving the task to the national numbering agencies. Ultimately eTrading Software was selected as the technical partner and manager of the DSB whose oversight falls to an ANNA-appointed board of directors. Most of the board members will represent national numbering agencies while a handful will represent minority investors whose funding is needed to launch the DSB. So far, ANNA has not disclosed how much the pricetag will come to but based on the global reach it is likely to run in the multimillions. ANNA provided seed funding from its existing coffers, but DSB is asking for far more external funding to support operations through its final development and first year of operations in 2018.
National numbering agencies issue ISINs for equities, fixed-income assets and exchange-traded derivatives. The codes are used by traders and post-trade operational experts to identify the financial instruments in the cross-border transactions they trade, clear and settle, as well as for regulatory reporting. Given ANNA’s role as the registration authority for ISINs, it stood to reason it would take charge of the ISIN project for OTC derivatives. Still, its dominant role doesn’t sit well with the influential trade group International Swaps and Derivatives Association which has accused ANNA of lacking transparency in its pricing and governance models as well as not giving its swap dealer members sufficient say. Data giant Bloomberg, which is promoting the use of its FIGIs as the better identification code for OTC derivatives, has also fueled the flames of dissent.
ANNA is countering the allegations of secrecy with a series of open industry consultations, the second of which was just released on DSB operations and technical specifications. Among the questions posed to market players are whether the DSB should be open 24-by-7 from the first, whether a cloud-based system is acceptable technology infrastructure, and whether average lag time of one second to receive an ISIN is fast enough during a crunch period. ANNA also asks if a four-hour recovery would be acceptable in the worst case scenario of a natural disaster which shuts down the DSB’s ISIN allocation engine.
In the consultation paper, ANNA suggests that cloud-based technology is the best approach because it ensures a quick time to market, easier scalability and lower cost. Likewise, ANNA posed the idea that, if the initial DSB schedule were based on European business hours, it could keep initial costs in check and reflect the regulatory requirements for ISIN-based reporting. ANNA is also asking financial firms if they want to participate in a coordinated UAT test with multiple market participants interacting with its system simultaneously. Although ANNA could certainly write automated scripts to simulate a UAT test, says Dannesh, firms may want to participate in the performance test to confirm the DSB can serve its purpose.
A recently appointed twelve-member DSB Product Committee, which will report to the DSB’s board of directors, sent out the first consultation paper about the ISIN structure and data management. Among the most critical questions posed to industry players is how far the DSB’s data validation process should extend beyond the minimal message validation. As a rule of thumb, the higher the degree of validation, the higher the DSB’s operating costs. Since the DSB runs on a cost-recovery basis, users might end up paying higher fees to receive ISINs.
“The concept of shared responsibility outlined in the concept release doesn’t mean that both the DSB and users will have a split responsibility in all cases,” says Danesh. “The DSB could end up responsible for some data validation as in uncovering discrepancies, while market players would be responsible for the accuracy of data which the DSB would have no reason to doubt.” Danesh offered the following example of a discrepancy related to a credit default swap which could be caught by the DSB. Say the underlying reference asset has a CFI code that is associated with a corporation, but the user lists the issuer as a sovereign wealth fund when applying for an ISIN, then the DSB could issue an alert to the user to correct the information, he says.
The next consultation, which will ask for feedback on proposed fee models, is likely to attract the most vigorous debate. Bloomberg executives have criticized the business model as not fulfilling the definition of a cost-recovery model, because the fees charged will likely incorporate a financial cushion to cover unexpected problems or fund the DSB’s undisclosed future plans. ANNA officials say that the DSB’s board of directors will be reviewing comments on the suggested pricing models before making a final decision.
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