Because many of these derivatives have never needed an ISIN before, the new regulations have required the construction of a fresh infrastructure to facilitate the near-real-time allocation of ISINs upon application by a user. The Association of National Numbering Agencies Derivatives Service Bureau (ANNA DSB) aims to fulfil this task, and will be the first numbering agency designed to operate globally.

The DSB will operate on a cost-recovery basis, and will charge fees—up to €65,000 per annum, depending on the type of service required—to three of its four categories of users: “power,” “standard,” and “infrequent.” The fees reflect the costs of ISIN creation and supplying those who do not create ISINs, but want to keep up with what ISINs are being issued, such as the fourth category of “registered” users, for whom access to the DSB is free of charge.

Licensing debates are usually the domain of the market data folks serving the front office. However, their back-office counterparts have gotten a taste of the same headache when trying to figure out what category of user they fall into. Following feedback from its first commercial document, ANNA DSB published a second version in September, which aimed to clear up some of the issues raised during its feedback period.

Financial firms have to pre-pay the DSB based on their category so it can afford to operate. But the finalized amounts will depend on how many firms sign up to use it. Then, because it is funded on a cost-recovery basis, the DSB will refund excess revenue to users. The deadline for signing up to the service has now been extended from September 22 to January 5, 2018. Then the DSB will calculate and announce revised fees by January 15, 2018. The recalculation will be based on all executed contracts received by January 5. If more users join the service, the fees per user will decrease. ANNA says that any surplus will be used to reduce fees in subsequent years. In the meantime, the DSB will either provide a refund or request more money by the end of March 2018 based on user numbers from the January 5 deadline.

Guessing Game

So until firms receive their invoices, they may not know exactly how much they will have to pre-pay the DSB for the first year of creating ISINs. However, the specific fee amounts alarm firms less than the licensing policy itself, which dictates the usage and distribution depending on which type of user firms designate themselves. Some market participants have criticized this fee model as overcomplicating a mission-critical service, and say it would have been simpler to charge for accessing the DSB. 

Richard Young, an industry and regulatory strategy executive at Bloomberg, says this approach ring-fences particular uses of the data. “The terms of the agreement that ANNA DSB has sent to data vendors are inconsistent with ISINs being an open standard and with ANNA DSB being operated like an industry utility,” he says.

There is also nowhere else to go for those who are not happy with the licensing contract. Unlike the registration of Legal Entity Identifiers (LEIs), which can be obtained from a choice of Local Operating Units (LOUs) that issue LEIs, no such choice exists for ISINs for OTC derivatives: The DSB is the only option. 

During an industry event last month, a representative for the ANNA DSB said that two rounds of consultation demonstrated the need for a fairer—or tiered—allocation of overheads than the simplistic model proposed by some. Specifically, there was broad industry acceptance that both creators and consumers of data should pay their fair share of overheads if they are “power” users. 

“With regards to the determination of user fees, there should be an a equitable distribution of those fees across not only those requiring assignment of ISINs, but also those who will be benefiting from the consumption of the data. With regards to the availability of the data, they need to have fulfilled regulatory obligations, [and] there is no restriction on usage or distribution of the end-of-day data that will enable firms to fulfil all those obligations. So the intraday data—or what we refer to as ‘power user’ data—is the dataset for where those fees are being collected to cover what is a cost-recovery model,” the ANNA representative said.

After publishing the first version of the user agreement, the numbering agency collected additional feedback and incorporated it “as far as reasonably practicable,” the ANNA representative said, adding that the organization is “very willing to review the approach once the service is up and running.” The allocation of fees for users will likely be reviewed in 2018. The representative also sought to emphasise that the fees charged by the DSB are “not for a commercial basis at all; it is cost recovery and equitable distribution—the fair distribution of those fees among all users of the service, not just those who need to create ISINs.” 

She said ANNA believes its current licensing agreement “is sufficient to cover the requirements of both the industry and to protect the DSB, and to protect those users as part of the cost-recovery model to ensure it will not force any additional impact or cost onto those users,” and also noted that the project had been “very challenging” as there is “no history, no data to base the decisions on. … Come next year, after we’ve had a year to look at how things have operated … we’ll be in a better position to see if we have to make any alterations on how we move forward.”

Ownership Uncertainty

However, critics say the main issue is not the fees but that the very nature of having a licensing agreement creates uncertainty around the ownership of the data. They say it would have been simpler to have a user agreement that allows people to access the DSB as needed. 

“The agreement contains language relating to the ‘ownership’ and restrictions on the use of data, which is supposed to be open,” Young says. “Other aspects of the agreement suggest that ANNA DSB will market both quasi-utility and commercial offerings, which also seems inconsistent with being an industry utility.” Young has also argued that the numbering agency should have created a document that did not warrant clarification in the first place. While some of the revisions have moved the agreement in the right direction, uncertainty still exists around some aspects of the licensing, which he says creates additional complexity for firms working to prepare for Mifid II. 

Some issues do appear to have been ironed out, though. When the initial commercial details were released, confusion surrounded the intellectual property—who would “own” the ISIN.  A head of regulation and compliance at a global bank says the first document seemed to imply that ANNA DSB was seeking to retain the IP around the ISIN. “We have had problems in the past with ISINs where Standard and Poor’s claimed ownership of the ISINs because for their US ISINs they embed a Cusip. This led to an EU antitrust investigation. The ISIN is supposed to be an open and free standard. We’ve had it flagged to us that there may be something in the proposals for the commercial terms which would almost seem to be on a parallel to S&P-embedded Cusip,” the bank exec says, adding that he has been assured that IP issues have now been resolved with the second release, and regulators have guaranteed this will not be the case.

Indeed, during a roundtable discussion at anther industry event last month, an Esma representative sought to reassure DSB users that it would not retain ownership of ISINs. “One of the core objectives behind ISIN was to get an identifier out there that was usable without any significant limitations or restrictions, and deliver what needs to be done within the regulatory framework—and that’s already a lot in terms of processes,” the Esma representative said. “It could have been better, but it could have been worse if certain actions were not taken to ensure that there are no restrictions or limitations. The ISIN, as with any reporting regime that we have, should not incentivize the creation of additional commercial interests, which become a blocking bottleneck for the market to be able to comply with the reporting requirements.”

One industry expert who spoke on condition of anonymity, says he is pleased with the changes ANNA took on board with its latest document, where it reworded the document to specify the fees for firms performing trade and transaction reporting, while firms that only carry out post-trade activities can access it for free—in other words, the DSB will not charge downstream outsourcing parties who only “touch” the OTC ISIN. For example, under the original DSB terms, outsourcing firms performing pre-existing matching and settlement of transactions—some of which takes place on the day of a trade—would have been required to pay for a licence. In practice, without this change, the matching and settlement process would have had to be postponed until T+1, which would have been counter-productive. 

“The revised DSB licence still requires firms that actually perform transaction reporting, or act as the supplier of new ISINs, to hold a licence—the logic being to ensure that the cost of the DSB is allocated across the user base fairly, and that all intermediaries involved in the ISIN creation process are licensed,” the industry expert says. 

Scott Preiss, managing director and global head of Cusip global services, says the criticism of ANNA DSB and the user agreement is unfair. “I can’t remember more collaboration between a utility like the DSB and the industry in forming not only the constraints and the data requirements, but also how the content is to be used. Thus far, the user agreement has been vetted endlessly with the industry, and it meets all the requirements of Esma and others. We’ve had very little negative pushback, and I’m sure the DSB board looks forward to continuing to work closely with the industry to make that a reality.” 

Connectivity 

The DSB went live in October, and according to ANNA, more than 500 users from 167 organizations have made use of the pre-production user acceptance testing (UAT) environment, which was open for five months. So far, 66 organizations have applied for direct FIX connectivity, of which 36 are active across 130 connections. Different fees apply, depending on whether users access the DSB via the FIX Protocol or XML. ANNA says more organizations have confirmed to the DSB that they are evaluating connectivity options, including utilizing intermediaries for programmatic connections. Many buy-side firms are planning to automate the free end-of-day file-download, while some are also investigating Power User (intraday API) connectivity.

Several sources express concern about how “completely dependent” they will be on the “mission-critical” DSB functioning correctly. Some project teams at would-be “power user” banks reported issues with the UAT environment, complaining of “throttling,” which refers to the practice of limiting how much data can be pushed into the system at one time—in this instance, meaning that there is a restriction on how many ISINs can be created at once. Power users can create up to 15,000 ISINs per month, which could cause a commercial and technological strain on the infrastructure. And with firms unable to go to another supplier, blockages could impact the ability to create ISINs, and hence the ability to trade. So while some of the commercial concerns around DSB are being ironed out, there may yet be other issues to resolve.