This article was originally published in Regulation Asia on August 19, 2024.
Imagine, for a moment, that the opaque world of derivatives trading is transformed into a transparent and robust universe where reported data enhances the accuracy and certainty needed to monitor and mitigate systemic risks. Then imagine the consistency, quality and accuracy of the reported data being readable across all jurisdictions. This is the reform agenda of the G20 – to bring greater alignment, efficiency, and resilience to the interconnected, global derivatives markets.
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Given that jurisdictions in North America, Europe and Japan have successfully implemented the first phase of changes to derivatives reporting rules, there are useful insights and valuable lessons that we can gain as other markets move towards implementation. More importantly, we need to know if there are any vulnerable areas that require attention when preparing for the upcoming rules rewrites to be implemented by The Australian Securities Investment Commission (ASIC) and The Monetary Authority of Singapore (MAS) on 21 October 2024.
Lessons Drawn
As with any major regulatory reforms, ample time, resources, and budget must be allocated to review current operations and introduce enhancements to accommodate new requirements.
The early availability of helpful tools such as message simulator check for ISO2022 XML schema validation can help to verify submissions, test the validation rules, and ensure reported trades are accepted for rules changes upon go-live. This also provides an excellent opportunity to anticipate unexpected operational hiccups in the reporting process and allow sufficient time to put in place a scalable and robust reporting solution to rectify issues and hence avoid future system revisions.
Information Sharing
Regional trade associations and market infrastructures have established industry working groups to help firms prepare for the rules changes, and reporting firms are encouraged to attend these sessions to access a repository of frequently asked questions while also sharing best practices to avoid potential implementation hurdles. These communication channels will also clarify the interpretation of rules and definitions and determine if data definitions are aligned with CPMI IOSCO guidance.
New Requirements
By now, firms should be aware that the focal point of implementing the new rules will center on the adoption of critical data elements (CDE) and identifiers, including the unique product identifiers (UPIs), unique transaction identifiers (UTIs) and legal entity identifiers (LEIs) – to progress with analysis and aggregation of reported data.
There may also be additional data using the same standardized format to serve local needs based on each jurisdiction’s unique framework and idiosyncrasies. Finally, the new obligation requires messages to be submitted in ISO 20022 XML format and standards to trade repositories.
Managing UPIs
The top-of-mind concern on the UPI subscription services provided by the Derivatives Services Bureau (DSB) is to the selection of the right model. Based on guidance from Emma Kalliomaki, Managing Director, Association of National Numbering Agencies (ANNA) and DSB, a one-size fits all model will not work given that firms have different needs, connectivity requirements, and automation expectations. Firms will need to review existing processes and decide how to integrate an over-the-counter identifier, such as the UPI in this instance, to its business. Factors to decide on the right model include the level of automation to manage anticipated UPI volumes, the need for human intervention and whether the integration with the DSB has already been set up.
According to Kalliomaki, there are three ways to connect to the DSB. For firms with lower volume requirement and some level of manual processing, the graphical user interface (GUI) option will enable searching and creation of UPIs in real-time. There is also the application programming interface (API) option, which enables machine-to-machine access to DSB’s service – ideal for firms looking to streamline and automate the retrieval and creation of UPIs to facilitate straight through processing. Finally, firms can choose to download UPI files – containing records that were created and updated during the day – directly from the DSB platform at the end of each day. As access to file downloads is based on the subscription type, Kalliomaki shared that this option is often used by firms that may already have built a database of UPIs. These firms will leverage DSB’s library to search for UPIs that do not exist within its existing database.
Successful Implementation
To ensure reporting efficiency and regulatory compliance on enforcement date, it is recommended that firms dive into the quality of data to be reported as well as the control framework, governance, and data lineage of trade reporting in order to prevent potential issues during production.
Due attention and time should also be devoted to onboarding to trade repositories, along with connectivity and user acceptance testing to detect issues and remediate before porting to production.
Firms should also not underestimate the value of enhanced pre- and post- reporting processes and systems supported by effective governance, collaborative project management and skilled expertise – to enable a smooth and successful implementation.
Future State
While the rules implementation will not be entirely aligned globally, the incoming changes around CDE, UTI, UPI, ISO 20022 standards represent significant progress towards data harmonization. With the introduction of UTI and UPI, the industry will be able to obtain a clearer mirror image of both sides of the trade. Despite the work ahead, the industry is advancing towards the right direction by harnessing technological advances and reusing codes in different ways.
In the future, we can expect to connect, share and temporarily merge datasets, perform analytics to determine and interpret data patterns, and expunge data if required. This progress will allow for a more complete, accurate and standardized data set to be captured globally to provide a holistic assessment on global exposures and the potential contagion impact following a market event.
Since every wave of rules rewrites will continue to require significant effort, each rewrite should be viewed as a marathon, not a sprint. It is only through our collective endeavor that we can increase the efficiency and transparency of the derivatives markets to reduce risk across jurisdictions.