What firms should know ahead of the DSB’s UPI launch

The Derivatives Service Bureau, a subsidiary of the Association of National Numbering Agencies (ANNA), will launch the Unique Product Identifier for over-the-counter derivatives on Monday, October 16, in what is a long-awaited reform of the post-financial crisis effort to make OTC derivatives markets safer.

Firms will have three months following the launch of the UPI into the production environment before the first compliance dates requiring its use take effect in 2024, with the US first to go on January 29.

The UPI is the third identifier in a three-part hierarchy issued by DSB. The UPI—which sits between the Classification of Financial Instruments (CFI) and the OTC International Securities Identification Number (OTC Isin)—will help authorities monitor systemic risk by aggregating OTC derivatives transaction reports within a central UPI reference data library and assigning each OTC derivative an ID based on a stipulated set of values and attributes.

“[The UPI] is kind of the common baseline across jurisdictions of what’s needed for product identification,” says Emma Kalliomaki, managing director of ANNA and DSB.

The idea for a derivatives product identifier has been in the works for more than a decade. At the Pittsburgh Summit in 2009, G20 leaders decided that OTC derivative contracts should be reported to trade repositories in order to increase transparency, reduce risk, and monitor market abuse. Technical guidance for the UPI finally came in a 2017 report from the Bank for International Settlements and the International Organization of Securities Commissions.

Then in April 2019, DSB was designated the sole provider of UPIs and the repository for the UPI reference data library by the Financial Stability Board, which first called for a UPI in a 2014 report also recommending the creation of the Unique Transaction Identifier (UTI) and the Legal Entity Identifier (LEI). DSB launched the OTC Isin and the CFI identifiers in 2017. In the face of all these acronyms, Kalliomaki notes that “under the OTC derivatives regimes, there’s no requirement to use an identifier,” at least not on a global scale.

Who knows how the UPI can evolve in time? … But the fact that you’re starting out with this point, you’re trying to cover these gaps is a good, good step in the right direction.

Joseph Berardo, Intercontinental Exchange (ICE)

In the EU, the UPI will only be required for OTC derivatives that do not already have an OTC Isin. Most importantly, the UPI will be the first OTC derivative identifier to be used globally, meaning that for cross-border trades and trades conducted in other jurisdictions, the UPI will be the only standardized taxonomy to identify OTC derivatives.

Starting in 2024, mandates for the use of UPIs for OTC derivatives will begin to come into effect. Six jurisdictions have set compliance dates. Swaps execution facilities in the US, which are under the purview of the Commodity Futures Trading Commission, will require UPIs at the end of January. In the EU, the European Securities and Markets Authority will require their usage on April 29. And in the UK, the Financial Conduct Authority will require them on September 30. Australia and most of Asia will follow suit on October 21. Japan, however, recently announced that the use of UPIs won’t be mandated until April 2025.

DSB expects to see other G20 jurisdictions—such as Africa, the Middle East, and broader parts of Asia-Pacific—to announce compliance dates as well.

According to a spokesperson for fixed-income trading venue Tradeweb, the vendor’s platform will provide UPIs from January 2024 to clients “as mandates requiring UPIs vary across different reporting regimes globally. Tradeweb wants to offer clients as much flexibility as possible by providing UPIs from January 2024, regardless of the platform they trade on.”

Joseph Berardo, director of credit default swaps and fixed-income bonds at Intercontinental Exchange (ICE) and co-chair of DSB’s UPI product committee, says, “with UPI and time, all the jurisdictions in the G20 are going to start requiring it, but the rollout of [those] requirements is going to vary across jurisdictions.” He adds that will be an “implementation challenge”.

Kalliomaki says she is optimistic that the launch will go smoothly. In April this year, the DSB went live with its UPI user acceptance testing environment. Firms currently enrolled in the UAT environment will need to re-enroll in the launch environment. The test data entered during the UAT phase will also not carry over into the launch environment on October 16.

In the launch environment, firms will have two functions: search and create. Once firms are in the live service, they can start generating new UPIs and retrieving UPIs that have already been created. DSB has begun pre-populating UPIs for existing OTC Isins following feedback the agency received from industry groups that said doing so would be helpful, Kalliomaki says.

DSB has provided rough estimates for the number of UPIs they are expecting. “With around 110 million Isins, we expect that to result in around 650,000 UPIs. By the time we go live, we think it will be around 113 million Isins. So around 700,000 UPIs, and we think on an ongoing basis, there are likely to be between 4,000 and 5,000 new UPIs per month,” Kalliomaki says. One UPI can be mapped to multiple OTC Isins because there are more data elements reported in a single OTC Isin than in the less-granular UPI.

As was the case during the UAT phase, firms will have three options to integrate the UPIs into their systems. The user interface option allows for manual creation and retrieval through the website, while the API connectivity option allows firms automatic integration of the data. There is also a file option for downloading end-of-day files. Kalliomaki says that among fee-paying users, API connectivity has been the most popular.

As of the end of last week, roughly 150 unique firms were registered as fee-paying users, about two-thirds of which had opted for API connectivity. Another 250 unique firms are registered as free users.

DSB is operating the UPI system on a cost-recovery model, meaning that the cost of the service will be shared across firms and the fees have the potential to decrease as more users are added. “Once we have the data to better understand the workflows and the interactions with the end users as to how that data is used, then we can consult again on how that fee model should evolve. But for now, it is based on the OTC Isin service,” Kalliomaki says. She adds that DSB expects there to be more users of the UPI than the OTC Isin.

Firms with paid subscriptions will receive early access DSB’s weekly snapshots of the full UPI population ahead of T+1 settlement. These files will become available on Sunday afternoons for fee-paying users and on Mondays for non-paying users. Kalliomaki says DSB discussed open-source options for the UPI system, but while there is free access and the ability to distribute and use this data, it is limited to registered users to mitigate security risks.

Non-paying users will have access only to the website’s manual search function and will be limited to a maximum number of searches on the website. They will not be able to create UPIs. Paid users have the option of four plans, each of which increases in technical complexity. The infrequent user and standard user plans do not have access to API connectivity, while the search-only API user and power user plans do.

The DSB has estimated that next year, for 120 firms registered as power users, annual user fees will be €63,491 ($66,890), while for an estimated 15 search-only users, the cost will be €15,873 ($16,723). After the power option, the paid infrequent user option has the second highest estimated number of users, at 102.

Firms in the EU and UK may need to continue reporting the OTC Isin for certain use cases, Kalliomaki says, as some of the specific data elements contained in the OTC Isin are still required under Mifir. Although there is divergence between the global regimes requiring UPIs, between the US and the EU, around 70% of the required data fields are the same, she says.

DSB is committed to the UPI being internationally usable. In August, DSB announced it would allow firms to use non-Isin identifiers such as the Sedol, Cusip, and Figi for UPIs’ underlier ID, needed to create and retrieve UPIs.

“If you’re identifying, in this case, an OTC derivative, it doesn’t matter if you’re doing it in New York, you’re doing it in Canada, you do it in Australia, London, Paris. … Everyone has this apples-to-apples comparison of what the instrument is. LEI achieved that for entity identifiers globally, and UPI is doing the same thing for the product,” ICE’s Berardo says.

Though the LEI has been sanctioned by the G20, the FSB, and the Regulatory Oversight Committee since its introduction in 2011, it has struggled to reach critical mass in adoption. More than 2 million LEIs have been registered, but it’s a far cry from initial predictions that it would need 40 million to 200 million registered codes to reach its aim of becoming a “barcode for business”.

But both Kalliomaki and Berardo say they are excited and optimistic about the launch. “I keep going back to the LEI as an example,” Berardo said. “That’s something that’s used way beyond what its intentions really were, which originally was for the derivatives market.” He says he is optimistic that the UPI might have a similar reach. “Who knows how the UPI can evolve in time? … But the fact that you’re starting out with this point, you’re trying to cover these gaps is a good, good step in the right direction.”

Editor's note: An earlier version of this article said that firms enrolled in the test environment would be automatically moved to the launch environment. Instead, firms currently in the test environment will need to re-enroll in the launch environment, themselves.