Regulatory Rewrites: The Launch of UPI Ignites a Silent Revolution

14/08/2023
Article

In the area of financial regulation, few changes have sparked as much transformative potential as the introduction of the Unique Product Identifier (UPI) into regulations as part of the current Global rewrites, to support and enhance the effectiveness of the current Classification of Financial Instruments (CFI), and International Securities Identification Numbers (ISIN) frameworks. Surprisingly much market feedback indicates that financial companies are underestimating the profound implications of these amendments. At the heart of executing these changes lies the Association of National Numbering Agencies (ANNA) Derivatives Service Bureau (DSB), a critical institution collaborating with the regulatory arms of the Bank for International Settlements (BIS). To what extent is UPI (and all the other amendments to financial instrument classification tools like ISIN, CFI, FISN, LEI and MIC) the key tool that significantly can improve the EMIR regulation? Let us have a look at that.

EMIR REFIT is where most European firms will first encounter the UPI.

EMIR, introduced in the aftermath of the 2008 financial crisis, aimed to enhance transparency and mitigate risks in the Over-The-Counter (OTC) derivatives market. However, as financial markets evolved, so did the need for regulatory reform. Matching rates of the registered trades and contracts still did not reach the percentage that would satisfy ESMA on their data quality level. EMIR Refit emerged as a response to the ever-changing financial landscape, introducing a series of measures to bolster market integrity and stability.

The high level, headline grabbing, changes in addition to the introduction of the UPI are listed below.

The dramatic extension of the data fields to be reported from about 120 to over 200.
The use of the XML standard ISO 20022 as the new rigid reporting format.
The overhaul and strong improvement of the reconciliation process.
Finally, the hardening of the clearing process between Financial, Non-Financial and Clearing House companies, redefining their duties and reporting obligations.

UPI: The Poster Child of the next generation of regulations

Central to the EMIR Refit’s revolutionary impact is the UPI, which is undoubtedly the cornerstone of improved regulation. Previously, the lack of standardized product identifiers hindered data accuracy and market oversight. However, with ANNA DSB at the forefront, the UPI framework brings uniformity and clarity to product identification. ANNA DSB will be the only source and as such the golden reference for UPI and OTC ISIN.

By providing each derivative contract with a unique and standardized UPI, ANNA DSB ensures seamless data reporting and regulatory oversight across jurisdictions. This newfound transparency empowers regulatory bodies to monitor systemic risks more effectively, promoting financial stability and investor protection.

What is the impact of UPI, CFI, and ISIN Changes

Financial companies often misread the transformative impact of the EMIR Refit’s UPI, CFI, and ISIN changes. They view these revisions as mere administrative adjustments, failing to grasp their potential to revolutionize the financial industrial landscape.

The UPI, in particular, is a game-changer, laying the groundwork for enhanced risk management and market transparency. Yet, many financial entities overlook the strategic value of this standardized identifier, neglecting the opportunities it presents for more efficient and compliant derivatives reporting. With its provision comes a whole 30 plus extra data point reconciliation, that helps addressing a myriad of data quality issues around the OTC contracts and products by allocation of standardized reference data.

(Pictures copyright by ANNA DSB, taken from the PDF “Introduction to the DSB” page 15.)

The UPI is part of the ISO Standards hierarchy, which includes OTC ISIN and CFI.

Anna DSB put the information presented above within the context of the attributes required to define an OTC derivative, an example of the expected OTC ISIN to UPI mapping is presented below.

(Table and Sample copyright by ANNA DSB Home Page)

Closing Thoughts

EMIR Refit has unleashed a regulatory revolution that financial companies seem to underestimate at their own peril. The deeply structured changes in UPI, CFI, and ISIN frameworks, driven by the diligent data efforts of ANNA DSB, have the power to reshape the financial landscape for the better.

Among these changes, UPI stands out as the key tool to improve EMIR regulation. Its ability to provide unique and standardized identifiers for derivatives contracts lays the foundation for greater market transparency, risk management, and investor protection.

As the financial industry continues to evolve, companies must recognize the immense potential of the coming regulatory reforms and embrace them wholeheartedly. By doing so, they will not only comply with regulatory mandates but also unlock new efficiencies and strategic advantages in an ever-changing financial ecosystem.

Practical Steps I can leave you with:

The UPI should be available from October 2023
Only Anna DSB can issue.
How will you source the UPI, is the new process in place, as proposed by the ANNA DSB.
Which license profile of ANNA DSB do you need? There are 7 different profiles to choose from.
Will you do this post-trade or into source system?
Is your source system vendor ready?
Remember that all OTC trades that currently have no ISIN must be reported from 29 April 2024 with at least a valid UPI.
ESMA in their latest Q&As indicated that they wanted either an ISIN or an UPI to be reported, until the UPI is established as the only unique key in the long run.