The rising of the ISIN
For several months an industry working group, spearheaded by ANNA, ISO and ISDA, has been grappling with the challenge of defining a methodology and creating a system that will enable the real-time creation and distribution of International Securities Identification Numbers (ISINs) for OTC derivatives, primarily to support MiFID II rules. On 14th September ANNA announced a partnership with Etrading Software, a professional services technology firm, to develop and manage a real-time ISIN generation engine, under the auspice of the Derivatives Service Bureau (DSB).
ISINs are currently used to identify fixed income and equity securities, and to some extent listed derivatives, but their use is alien to the OTC market. Not only does the sheer volume and permutations of OTC instruments challenge the use of a standardised identifier, but the lead time for ISIN assignments – 1-3 working days – does not marry with the pace of OTC trading.
ANNA’s announcement, therefore, will be welcomed by an industry that is dealing with a plethora of MiFID II challenges. In theory, an investment firm will be able to send a raft of pre-defined instrument attributes to the DSB (which will vary by product type and level of ISIN required), and a unique ISIN will be provided in near real-time. The investment firm can then use the ISIN to trade on, and importantly to support their pre-trade transparency, post-trade and transaction reporting obligations. The proposed solution has a number of key – and in some cases ground breaking – features.
- Real-time engine: Etrading software has been chosen to develop an engine that will allow for the creation and distribution of ISINs in real-time at the request of an investment firm.
- Open source architecture: This will provide flexibility for future product evolutions and should enable easy integration with existing industry protocols, such as FIX and fpML.
- Unique OTC ISIN construct: Initial technical documentation suggests that OTC ISINs will be 12 digits long, starting with the prefix “EZ”. ISINs will be allocated within a hierarchy (currently being defined), which will appreciate the differing levels of instrument data availability at different levels of the trade lifecycle. For example, a level one ISIN can be generated using a number of base attributes to support liquidity calculations, whilst a level 3 ISIN requires additional granular attributes, to determine economic equivalence.
It appears that development is progressing ahead of plan, with technical specifications expected before the end of the year and industry testing ready to begin in Q1 2017. These timelines hint towards an uncharacteristic level of preparedness for a regulation that doesn’t go live until January 2018, however, with so much still to do banks should appreciate that full industry UAT between integrated and robust end-to-end solutions is unlikely to be possible until Q3 2017. Between now and then, banks should be focussing on the following areas:
- Process: Financial institutions will face a fundamental shift in booking procedures, as ISINs will be required for both pre and post trade processing. Data sourcing, storage and maintenance processes will also be impacted.
- Technology: New or enhanced systems will be required to request, capture, store and redistribute ISINs for OTC instruments. Due to the real-time nature and hierarchy of the OTC SIN requests, banks will need high performance, integrated capability across trade capture systems, hierarchy based data models, reference data systems and possibly a new OTC utility to manage requests.
- Operations and controls: New policies and responsibilities will be needed to support the enhanced processes and ensure ongoing maintenance of a high volume of data.
OTC ISINs are an exceptional development for an industry and a market that will undergo significant change in the next 15 months. A standardised identifier, distributed by a central body, will certainly allow ESMA to increase transparency of a traditionally murky market. However, the new product taxonomies, the increased volume of reference data and new systems to connect to will create additional burdens for investment firms that will already be under great pressure to deliver in time for January 2018. Staying abreast of industry developments and designing suitable solutions before year-end will be essential.