As UPI regulatory reporting goes live in U.S., there are opportunities for European OTC derivative markets

In 2014, in the aftermath of the 2008 financial crisis, the Financial Stability Board (FSB) proposed a globally harmonised Unique Product Identifier (UPI). Its purpose was to assist regulators in identifying the build-up of systemic risk in over-the-counter (OTC) derivatives.

Ten years later, and following a huge international effort from regulators, standards bodies, industry and the Derivatives Service Bureau (DSB), which issues the UPI, 2024 will see the realization of the G20’s UPI commitment.

On January 29, the United States became the first G20 jurisdiction to implement mandatory Unique Product Identifier reporting. Many firms are now gearing up for the second milestone on April 29, when UPI reporting starts in the European Union.

Below are insights from the DSB on the U.S. launch, as well as a look ahead to the start of EU reporting and the much-discussed question of scope. 

U.S. UPI reporting now live

Since the Derivatives Service Bureau launched the UPI Service User Acceptance Testing (UAT) environment in April 2023, followed by the UPI Service production environment on October 16, 2023, industry preparation has gathered momentum.

With U.S. regulatory authorities playing a long-term and active role in the development of the UPI and its reporting requirements, the DSB hosted a virtual Q&A with the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) to answer industry questions on January 17. At this point, data showed that users were taking the necessary actions to meet compliance obligations.

A total of 131 organisations have fee-paying subscriptions, and 35% of onboarded organisations have headquarters in the United States. By the end of January, this figure had reached 40%, making the United States the jurisdiction represented by the most entities. 

The number of UPIs created is another figure of perennial interest to DSB stakeholders. By the end of January 2024, users had created 225,000 UPIs, in addition to the approximately 700,000 UPIs created by the DSB using its own database. This has resulted in a cache of almost 1 million UPIs at the start of U.S. reporting. 

With the DSB UAT environment enabling firms to test workflows, data integration options and downstream processes in advance of compliance dates, DSB data shows that users spend an average of two months in testing before shifting into production.

EU is next

On April 29, 2024, the EU EMIR Refit Regulations will come into effect, introducing a specific scope for UPI reporting alongside the existing use of ISIN for OTC derivative reporting. The ISIN, like the UPI, is an International Organisation for Standardisation (ISO) identifier issued by the DSB. 

Questions about whether to report the ISIN or the UPI, and why the EU chose both identifiers, come up regularly. There is a definite rationale for the EU’s approach: cross-regulation consistency and lower reporting burdens for firms. 

Today, the EU and UK use the ISIN in three sets of reporting rules: THE Markets in Financial Instruments Regulation (MiFIR) for both price transparency and market abuse detection purposes and under the EMIR to aggregate OTC derivatives data. European regulators decided to use the ISIN for EU regulatory reporting under MiFIR back in 2015, but knowing the UPI was on the horizon, the DSB worked with market participants, the ISO and EU/UK regulators to ensure the ISIN design was consistent and complementary with the UPI. 

That means UPI data attributes and the UPI code itself are included in the ISIN record. If you have the ISIN, you have the UPI, ensuring global convergence and harmonisation. 

The below table illustrates the complementary nature of the UPI and the ISIN. For each OTC derivative, the ISIN and UPI share the same attributes, with the ISIN having a couple of additional attributes as a more granular identifier.