DSB Outlines New Path for OTC Derivatives Data Standards

Tuesday, 16/07/2024 | 07:00 GMT by Damian Chmiel

The Derivatives Service Bureau has presented an updated roadmap for OTC derivatives.

DSB plays a critical role in supporting transparency and regulatory compliance in the industry.

The Derivatives Service Bureau (DSB) has released its Industry Consultation Final Report on over-the-counter (OTC) derivatives, addressing key developments in reference data services. The report outlines plans for service enhancements and stakeholder feedback on critical industry issues.

Derivatives Service Bureau Releases Final Report on OTC Derivatives Industry Consultation

The report addresses key developments in OTC International Securities Identification Numbers (ISINs), Classification of Financial Instruments (CFI) codes, and the Unique Product Identifier (UPI) service.

This year's consultation, which for the first time includes the new UPI Service, comes at a critical juncture as G20 regulatory reporting mandates are set to take effect throughout 2024 and 2025. The report synthesizes feedback from industry stakeholders and DSB's industry representation groups on a range of topics crucial to the evolution of DSB services.

Key areas addressed in the report include proposed enhancements for automating existing processes related to Data Leakage Prevention, Data Classification, and Data Labelling. The DSB also plans to move forward with a combined Governance, Risk & Compliance and Third-party Risk Management tool.

Emma Kalliomaki, Managing Director of ANNA and the DSB, emphasized the importance of industry input, stating, “Stakeholder feedback is vital in understanding the industry's drive for change across functionality, user types, fair cost apportionment, and the overall delivery of services that best serve evolving requirements.”

The report outlines the next steps for creating a set of terms and a fee model for intermediaries across all user types. It also describes changes regarding the provision of the UPI as part of the OTC ISIN Service. Additionally, it addresses the future of the TOTV (Traded on a Trading Venue) Service as part of cost recovery and the continuation of the Global Agile Architecture program.

Industry participants and interested parties can access the full report on the DSB website. As the sole source of multiple ISO standards for OTC derivatives, including ISINs, UPIs, CFIs, and Financial Instrument Short Names (FISNs), the DSB plays a crucial role in fostering standardization and transparency in the financial industry.

The organization's efforts align with its mandate from the Financial Stability Board of the G20 to operate as the exclusive global provider of the UPI Service, enabling authorities to aggregate data on OTC derivatives transactions.

How ISIN, CFI and UPI Works

The Derivatives Service Bureau's ISIN, CFI, and UPI identifiers are crucial in enhancing transparency, standardization, and regulatory compliance in the OTC derivatives market.

ISIN is a unique 12-character alphanumeric code that globally identifies a specific security, such as stocks, bonds, or derivatives. It's like a universal “serial number” for financial instruments, making them easily recognizable across different markets and countries.

CFI classifies financial instruments into categories based on their characteristics. This is similar to a “genre” label for securities, helping to quickly identify the type of instrument (e.g., equity, debt, option).

UPI is a separate code specifically designed for over-the-counter (OTC) derivatives. It provides more detailed information about the product's characteristics. In terms of detail, it sits between the broader CFI and the more specific ISIN, offering a standardized way to describe complex derivative products.

Here's how these identifiers help the financial industry:

Increased transparency: provide standardized ways to identify and classify OTC derivatives.
Regulatory compliance : These identifiers are being incorporated into various regulatory frameworks globally. Risk management: These identifiers help financial institutions and regulators better assess and manage systemic risk in the OTC derivatives market by providing a consistent way to identify and classify derivatives.
Data aggregation and analysis: The hierarchical nature of these identifiers (CFI providing broad classification, UPI offering more details, and ISIN providing the most granular information) allows for flexible data aggregation and analysis at different levels of detail.
Global standardization: As ISO standards, these identifiers promote global consistency in how OTC derivatives are identified and reported across different jurisdictions.
Market efficiency: Standardized identifiers facilitate more efficient communication and data exchange.
Support for regulatory oversight: These identifiers enable regulators to more effectively monitor financial markets for potential risks and abuses, fulfilling a key goal set by G20 leaders following the 2007-2008 financial crisis.
Evolving with market needs: The DSB conducts regular industry consultations to ensure these identifiers and related services continue to meet the evolving needs of the financial industry.

The DSB plays a critical role in supporting transparency, risk management, and regulatory compliance in the OTC derivatives market by providing these standardized identifiers.

Derivatives Service Bureau Releases Final Report on OTC Derivatives Industry Consultation

How ISIN, CFI and UPI Works

The Derivatives Service Bureau's ISIN, CFI, and UPI identifiers are crucial in enhancing transparency, standardization, and regulatory compliance in the OTC derivatives market.

Here's how these identifiers help the financial industry:

Increased transparency: provide standardized ways to identify and classify OTC derivatives.
Regulatory compliance : These identifiers are being incorporated into various regulatory frameworks globally. Risk management: These identifiers help financial institutions and regulators better assess and manage systemic risk in the OTC derivatives market by providing a consistent way to identify and classify derivatives.
Data aggregation and analysis: The hierarchical nature of these identifiers (CFI providing broad classification, UPI offering more details, and ISIN providing the most granular information) allows for flexible data aggregation and analysis at different levels of detail.
Global standardization: As ISO standards, these identifiers promote global consistency in how OTC derivatives are identified and reported across different jurisdictions.
Market efficiency: Standardized identifiers facilitate more efficient communication and data exchange.
Support for regulatory oversight: These identifiers enable regulators to more effectively monitor financial markets for potential risks and abuses, fulfilling a key goal set by G20 leaders following the 2007-2008 financial crisis.
Evolving with market needs: The DSB conducts regular industry consultations to ensure these identifiers and related services continue to meet the evolving needs of the financial industry.

The DSB plays a critical role in supporting transparency, risk management, and regulatory compliance in the OTC derivatives market by providing these standardized identifiers.