Unique Identitifier Codes - The jury is still out

By Allan Grody, president at Financial InterGroup

On June 10, 2015 the Swaps Data Repositories (SDRs) of DTCC, ICE and CME collectively responded to the SEC’s Final Rule on Security-Based Swaps Reporting (SBSR). This collective response focused exclusively on the details of UIC’s (Unique Identity Codes).[1]

While an ‘afterthought’ from their separateearlier comments posted on May 4, they stepped up to add clarity to the issuessurrounding unique identity codes such as legal entity, product, transaction,trader, and branch codes  – what we havetermed the ‘Barcodes of Finance’ [2].The very nextday, on June 11, 2015 a group of trade associations, calling themselves theJoint Association representing global swaps participants also published astatement calling for industry members and regulators to rationalize these samecodes.

[3]

Then on July 20, 2015 ISDA presented apublic document on the fifth anniversary of the Dodd-Frank legislation, againechoing the need to develop and adopt standardized product and transactionidentifiers, as well as reporting formats.[4]

These codes, properly implemented, have thepower to transform financial transaction flows, bring regulators in line withtheir oversite mission, and permit the concept of straight-through-processingto become a reality. Most importantly the issues surrounding UICs need to beresolved quickly as billions of swaps transactions are sitting in SDRs withill-structured and poorly designed codes and data tags. Computers are unable toaccess them in any uniform manner or aggregate them. It has left swaps regulatorsblind to the contagion of systemic risk.

The SEC, CFTC and Office of FinancialResearch asked in 2010 for such codes and passed the coordination of the firstcode and its implementation to the G20’s Financial Stability Board (FSB), theglobal standards body created in the aftermath of the financial crisis. The FSBissued requirements for a series of unique, unambiguous and universal identitycodes starting with the legal entity identifier (LEI) for financial marketparticipants. They later took on the definition of contracts and instruments(the unique product identifier – UPI), and transactions (the unique transactionidentifier – the UTI). With the use of these codes further drill down to codesfor desk, trader, and branch could be developed. These codes collectively arereferred to as UICs.

The LEI has been the first out of the gate.They are being used in reporting swaps to 25 SDRs across the globe, includingthree in the US. The issue of the LEI and the other principal UICs is thatbillions of transactions are accumulating in these SDRs with attached LEIs,UPIs and UTIs but there is no means to reconcile them nor aggregate them forrisk analysis.

That these codes are not unique,unambiguous and universal is now well recognized. In their present forms they arenot fit for the FSB’s intended purpose of collecting information on allfinancial transactions conducted by all financial market participants in allfinancial products for use in systemic risk analysis. However, with current technologydemonstrating that data collection of financial transactions on such a massivescale is possible[5], the UICs becomethe prerequisite pillars of this capability. Without them they will leaveregulators and industry far short of their goals for observing contagion buildingup in the financial system.

The LEI initiative, with nearly 380,000 codesissued to date for swaps participants, has only now acquired the capability toreconcile duplicates and conform LEI registry data to a standard data format.How many duplicates or improperly coded records will be uncovered using thisnew capability is not yet known. Already 70,000 have been “lapsed” due to thefailure to ‘recertify’ them annually. Many of these were the result of beingissued prematurely and indiscriminately before final rules were promulgated bythe FSB.

This summer, a public consultation will beconducted on how to establish the ultimate parent for each LEI, one of therequirements for UICs for swaps data reporting. The public consultation will alsosolicit interest in understanding how to provide hierarchies of ownership andcontrol of LEIs embedded in financial transactions for data aggregation.[6]

The LEI is obviously still a work inprogress. There are no assurances that given further enlightenment from theconsultation that LEIs will not be sent back to the drawing board. In effectthis is the request for all UICs made by the three US SDR’s and by the “JointAssociation” – to revisit the UICs structure and governance.

What has not been given a fair hearing todate is that such a universal system of identification already exists – it isfound in the barcodes of commerce and in Internet naming protocols and codingconventions. However, these two global coding conventions had been dismissedearlier in discussions with industry trade associations’ as not a relevantmodel for finance. The three SDRs and the Joint Association group are lookingfor other solutions, mostly favorable to their existing operating models, whilethe solution the regulators have been asking for, self-registration, is inplain sight.

The model of self-registration is the modelused in the commercial barcode and the Internet’s coding conventions.  However, regulators approved a host of dataintermediaries to insert themselves into what was intended to be both theself-assigning and self-registering of codes by financial market participantsdirectly. In the case of the LEI these ‘third parties’ are assigning codes andvalidating data using after-the-fact second or third level sources even thougha ‘second- eyes’ certifying agent at the originating source (such as an auditor[7]) could be used.

The UTI is still intended to beself-assigned by market participants but, unfortunately not yet with universaldefinition nor an agreed upon code structure. It has not worked well in eitherthe US or the EU even though they are assigned by each financial marketparticipant (or their agent). Different reasons for their lack of conformitysurfaced regardless of whether UTIs were placed on each of the two sides of asubmission to SDRs required in the EU or on only one side as submitted to SDRsin the US. The UTI has no universal definition and hence, multiple versions ofthe UTIs are flowing into SDRs. The UPI with no universal definition islikewise problematic.

The three SDRs in the US argue for holdingback on enforcing the UIC provisions in the SBSR rules for the reasons notedabove. They also note that the rule is difficult to implement in regard to whocorrects errors in the codes on the one sided submissions required byregulators in presenting swaps transaction for posting in SDRs– the SDRs or themarket participants. Finally, the SEC has still to gain clarification on whatprocedure must be followed to register a LEI by one legal entity through athird-party agent for another legal entity that is part of a single organizationalstructure[8].

Finally, if we had started on this journeyby designing what the framers of the legislation had asked for -- commonreference identifiers for participants and products[9]-- we could have extended such a common code structure to include all UICs suchas those constructed within a common framework in the successful implementationof the barcodes of commerce[10].

What now needs to be done, as is being requestedby the three US SDSRs and the Joint Association, is to pause and conduct acomprehensive study on the entire range of required UICs to determine the best codestructure and governance framework that is fit for all their intended usesglobally. We may find that an integrated framework of code construction alreadyexists in commerce and on the Internet that can be applied to finance.

The problems that have arisen in the use ofUICs in swaps data reporting should be considered a pilot or beta test, andtaken as a needed pause for studying the issue on a more macro basis. Creatingthe Barcodes of Finance cannot be done through silos of markets, sovereignjurisdictions or regulators. This must be a global solution to a global issue.

[1] See DTCC Data Repository (US) LLC, et al “Comments on ProposedRule: Regulation SBSR - Reporting and Dissemination of Security-Based SwapInformation” at https://www.sec.gov/comments/s7-03-15/s70315.shtml

[2] “Risk, Data and the Barcodes of Finance” at http://ssrn.com/abstract=2544356

[3] JointAssociation letter “Key Principles to Improve Global Trade Reporting and DataHarmonization” at http://www2.isda.org/attachment/NzY1OA==/Joint%20Trade%20Association%20Data%20Harmonization%20letter.pdf

[4] The Dodd-Frank Act: Five Years On, July, 2015 at http://www2.isda.org/attachment/NzcxMg==/Dodd-Frank%20Briefing%20Notes%20FINAL.pdf, page 10

[5] Final Reporton Global Identification Standards for Counterparties and Other FinancialMarket Participants, March 10, 2015 at http://ssrn.com/abstract=2016874pages 39-42

[6] www.LEIROC.org, “May 13”announcement

[7]“The Global Risk Regime – New Roles for Auditors”, April 21, 2015,  http://ssrn.com/abstract=2508399

[8] Financial InterGroup Holdings Ltd, May 18, 2015 “Comments onProposed Rule: Regulation SBSR - Reporting and Dissemination of Security-BasedSwap Information” at https://www.sec.gov/comments/s7-03-15/s70315.shtml

[9] SEC, Regulation SBSR – Reporting andDissemination of Security-Based Swap Information, Federal Register / Vol. 75,No. 231 / Thursday, December 2, 2010 / Proposed Rules, Dec. 10, 2010, http://www.sec.gov/rules/proposed/2010/34-63446.pdf, page 204

[10] Commentsby GS1 and Financial InterGroup to SEC on RegulationSBSR—Reporting and Dissemination of Security-Based Swap Information, February 142011  at http://www.sec.gov/comments/s7-34-10/s73410-57.pdf, pages 14-26)