Ready for the unique product identifier (UPI) in two years?

Emma Kalliomaki, managing director of the Derivatives Service Bureau (DSB), explores UPIs for over-the-counter (OTC) derivatives, how and when they will be introduced, and the responsibilities of the DSB as designated service provider for a future UPI system

Introduction 

Emma Kalliomaki, DSB

The Financial Stability Board (FSB) announced on May 2, 2019 that the DSB would be designated as the sole service provider for the future UPI system, performing the function of issuer of UPIs as well as operator of the UPI reference data library.

The DSB is working towards providing UPIs for OTC derivatives in the second half of 2022, which will enable global regulatory authorities to aggregate data on OTC derivatives transactions to help assess systemic risk.

What is a UPI?

UPIs are designed to facilitate effective aggregation of OTC derivatives transaction reports on a global basis.

In the first instance, the role of the UPI is to uniquely identify the product involved in an OTC derivatives transaction that an authority requires, or may require in the future, to be reported to a trade repository (TR). The UPI will work in conjunction with unique transaction identifiers (UTIs) and critical data elements (CDEs), which are also expected to be reportable to global regulatory authorities. 

The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (Iosco) published their finalised UPI technical guidance in September 2017. Under the guidance, a unique UPI code would be assigned to each distinct OTC derivatives product and be mapped to reference data elements with specific values that describe the product. The collection of reference data elements and their values for each product would reside in a UPI reference data library administered by the UPI service provider.

Working alongside the UPI and CDE, the UTI is intended to uniquely identify individual OTC derivatives transactions required by authorities to be reported to TRs. The UTI will enable aggregation and analysis of these transactions so authorities can use reported information to fulfil their legal obligations and prudential requirements. Further details about the UTI can be found in the UTI technical guidance document published in February 2017. 

Authorities also published a guidance document on the harmonisation of critical OTC derivatives data elements other than those in the UPI and UTI. The CDE technical guidance document, published in April 2018, provides information about the definition, format and allowable values of CDEs, other than UTI and UPI, reported to TRs that are important to facilitate consistent global aggregation by authorities.

Why is the UPI being introduced? 

Group of 20 national leaders agreed at the 2009 Pittsburgh Summit that all OTC derivatives transactions should be reported to TRs as part of a package of reforms to the OTC derivatives markets. The key driver for establishing the UPI (ISO/WD 4914 – which is under development), UTI (ISO 23897), CDE (CDE elements will be included in ISO 20022) and legal entity identifier (LEI) (ISO 17442) was to increase transparency in financial markets, mitigate systemic risk, and protect against market abuse following the financial crisis that began in 2007–08. The development of standards for these data elements was in response to a request from the G20 to achieve these objectives.

UPIs are being introduced as a mechanism to identify OTC derivatives products to assist G20 regulators to aggregate global OTC derivatives data by either product or UPI reference data element, together with the CDE and UTI. This will provide regulators with an improved, consistent view and common understanding of systemic OTC derivative risks.

Although the UPI has been developed with this core purpose, it is recognised the UPI could also serve other purposes, such as other forms of regulatory reporting and market transparency specific to particular jurisdictions or pre- and post-trade processes, provided this does not hinder the primary use of the UPI as defined for the reporting of OTC derivatives transactions to a TR or for regulatory use. It is anticipated that broader use cases for the UPI system – especially in relation to internal business functions – could increase its adoption and usefulness.

What governance arrangements are in place? 

The FSB, an international body that monitors and makes recommendations about the global financial system, has been responsible for defining the governance arrangements for the UPI. To that end, the FSB designated the DSB as the sole service provider for the future UPI system. The term ‘UPI system’ refers to the UPI code, the UPI reference data library, and the process of assigning a UPI to a set of reference data elements. Accordingly, the DSB will perform the functions of issuance of UPI and maintenance of their associated reference data as required by the UPI technical guidance. This is a key step in completing the governance framework for the UPI. 

In October 2019, the FSB published the Governance arrangements for the UPI, outlining its conclusions, implementation plan and next steps to establish the International Governance Body (IGB). In co‑ordination with CPMI and Iosco, the FSB decided that the LEI Regulatory Oversight Committee (LEIROC) is best positioned to become the future IGB for the UPI, UTI and CDE in addition to its existing oversight of LEI, provided it made the necessary adjustments to its existing governance to be fit for purpose for these additional identifiers. In September 2020 the FSB transferred all governance and oversight responsibilities in relation to the harmonised derivatives identifiers and data elements to LEIROC as of October 1, 2020. On the same date LEIROC announced and published its revised Charter. 

Furthermore, the FSB has also confirmed the International Organization for Standardization (ISO) as the body responsible for developing and maintaining the UPI and associated data elements as an international standard. Work on the UPI standard began in June 2020 with the aim to publishing a final ISO standard in early 2022.

In addition to oversight functions, the governance arrangements also include the need for ongoing collaboration between the IGB, the UPI service provider and industry stakeholders. On this basis, the DSB Product Committee and Technology Advisory Group will function as industry representation groups comprising reporting entities, derivatives infrastructure providers and market data providers.

How does the UPI work alongside other identifiers?

The DSB is responsible for serving the needs of OTC derivatives market participants through the allocation and distribution of International Securities Identification Numbers (ISINs), the Classification of Financial Instruments (CFI) code, and the Financial Instrument Short Name (FISN) – all globally recognised and adopted ISO standards. Each standard has an individual purpose and complements each of the other standards. They are all used for identifying, classifying and describing financial instruments.  

The UPI, currently being developed as an ISO standard (ISO/WD 4914), will sit within the suite of ISO standards provided by the DSB as a product level identifier, reflecting a subset of the data elements required for OTC ISIN. This means the UPI is anticipated to sit between the CFI and OTC ISIN representing an identification framework for OTC derivatives.

More details on the relationship between CFI, UPI and OTC ISIN can be found in So what’s in the CFI, UPI and OTC ISIN?

When is the UPI going to be implemented?

As part of its Governance arrangements for the UPI, published in October 2019, the FSB outlined high-level expectations for global implementation planning. It was recognised that jurisdictional implementation is likely to be staggered, occurring at varying speeds because of the independent decision-making processes and prioritisation of initiatives. 

Allowing for legal changes to be made and for TRs and reporting entities to adapt, the FSB recommendation is that jurisdictions undertake the necessary actions relevant to their situation to implement the UPI technical guidance no later than the third quarter of 2022.

In preparation for UPI adoption and implementation by supervisory authorities, the DSB continues to work with LEIROC, the authorities and industry stakeholders to refine the requirements and framework for UPI integration.  

The DSB will provide updates on implementation as it develops.

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