Don’t Underestimate UPI Challenges. How to Stay on Track.

After emerging from the vast array of changes included in Phase I of the CFTC Rewrite last year, you would be forgiven for thinking that switching product identifiers in CFTC Rewrite Phase II, and subsequently for EMIR REFIT, will be a breeze. You may be surprised.

‘Unique Product Identifiers’ (UPIs) are a complex system of standardization which will be an integral part of trade capture, data processing and transaction reporting for over-the-counter (OTC) derivatives, and they will become the baseline product identifier for G20 financial supervision. However, whilst UPI is the new focus, International Securities Identification Numbers (ISINs) are not going anywhere.

While keeping ISIN flows intact, many systems will need to build the capability to consume and publish UPI data. Additionally, upstream systems may need to request new UPIs on a trade-by-trade basis. Given the interdependent complexity of regulatory requirements and trade repository validation rules, it will be challenging to avoid a new wave of submission rejections and technology issues.

While Exchange Traded Derivatives (ETD) remain reportable using ISINs, market regulators are looking to enforce UPI requirements upon OTC derivatives. A UPI code will be assigned to each OTC derivative product and will contain specific values that together describe the product. Each product identifier and related reference data will be stored in a UPI reference data library, administered by a globally appointed UPI service provider.

The Derivatives Service Bureau (DSB), founded by the Association of National Numbering Agencies (ANNA), has been designated as the sole global UPI service provider of UPI codes and the UPI reference data library. DSB is also the sole source of other ISO standards such as ISINs, Classification of Financial Instruments Codes (CFIs), and Financial Instrument Short Names (FISNs).

The following diagram of ANNA-DSB ISO standards highlights the granularity of each standard with ISINs, the most granular, at the base of the triangle and CFIs, the least granular, at the triangle’s peak:

New Functional Requirements

Live UPIs can be created in and sourced from ANNA-DSB starting on October 16, 2023, and to ensure a smooth holiday season, this is when trade capture and securities applications should look to go live. By this time, upstream systems should have their own library of UPI templates and when a new identifier is needed, they should be able to request and receive it from ANNA-DSB within a moment’s notice.

Most firms will treat UPI as a trade attribute stored upstream, but there is also the option of purely building in the reporting engine, bearing in mind that identifier data will not be available to upstream consumers. Regardless of how the data is consumed, the flow of UPI attribute data will be important, and some identifier attributes will be used by trade repositories to validate submissions. In such cases, if the attributes (e.g., Instrument Type, Delivery Type, Underlying Asset Type) of existing UPIs do not synchronize with the reported transaction attributes, the submission will be rejected. Ensuring identifiers and respective attributes align throughout the reporting flow will be critical on day 1 and will continue to be important as new UPIs are continuously created. Based on current OTC ISIN data, ANNA-DSB estimates over 100 million UPIs will be populated ahead of CFTC go-live (January 29, 2023), and 5 thousand will be created every month after.

Challenges on the Horizon

Many firms will face unexpected challenges with their UPI implementation and go-live. Here are some of the key challenges we anticipate:

• Service Selection: firms will need to select a suitable ANNA-DSB service and subscription model in line with expected trading volume, complexity, and jurisdictional requirements. Detailed analysis into global trading activity will need to be conducted in advance of this.
• Platform Integration: firms will need to decide between implementing full API connectivity, with integrated inbound and outbound dataflows or a more manual solution such as static tables, end of day files, or manual lookups, before compliance deadlines.
• Flow Enhancements: firms will need to update existing process flows, establish new operational procedures and redesign the control framework to ensure data completeness and accuracy.
• Control Framework: firms should implement controls to validate that the obtained UPI is correct, both internally for the trade data set being reported (given the TR will also be validating this value) and with the counterparty (given the UPI could differ based on each firm’s interpretation of product traded).

How First Derivative Can Help

When there are new reporting validations, ‘negative acknowledgements’ (NACKs) are soon to follow. Here are some of the ways in which our consultants and analysts can apply lessons learned to ensure a smooth implementation:

• Reference Data: most firms are already setting up libraries of UPI templates where each UPI and associated attributes can be referenced and published downstream. Our Data Analysts can run impact analysis and set up thousands of templates to ensure data accuracy.
• Quality Assurance: the current volume and complexity of reporting requirements is unprecedented, so ensuring accuracy is more challenging than ever. Our Business Analysts are seasoned in quality assurance and can employ combinations of accuracy controls which demonstrate complete coverage.
• Resubmitting Open Trades: Unlike CFTC Rewrite Phase I, there is no grace period for backloading open trades in Phase II. While EMIR REFIT will have 6 months for backloading, the CFTC is requiring all open positions to be updated with a valid UPI on go-live. Our Senior Data Consultants can help prepare firms with a submission strategy which can be set in motion well before go-live.
• Reg Exam Preparation: heightened scrutiny from regulators will likely follow a year of sweeping changes. Our Senior Business Consultants can help firms conduct trade reporting reviews and mock exams, so they are well prepared for the next regulatory exam.

The scope of regulatory change seen this year in the OTC derivatives space is unprecedented. First Derivative is here to help firms pioneer the new regulatory landscape safely and quickly. No surprises; just quality regulatory solutions.

Thomas Kapp Senior Consultant First Derivative LinkedIn profile