A group of influential buyside trade bodies has come out in support of a controversial identifier used in reporting derivatives trades, while Europe’s top markets regulator says that those opposed are not reading the rules correctly.
European regulators will mandate the use of the International Securities Identification Number for reporting some derivatives trades, as part of the review of the Markets in Financial Instruments Directive. This is a unique, 12-character code that individually identifies a particular security and is part of the reporting overhaul included in Mifid II.
The UK’s Investment Association, the Dutch Fund and Asset Management Association, German investment funds body BVI and the Austrian investment company association Vöig wrote to the European Commissioner Jonathan Hill on March 14, saying they “strongly support” the use of ISINs, which they described as “fit for purpose”.
They added they were “concerned about the misperceptions being perpetuated in the current debate about the ISIN”.
Other trade bodies, namely the International Swaps and Derivatives Association and the Global Financial Markets Association, had written to Hill on December 15, 2015, expressing their concern over technical and competition issues that might arise from mandating the use of ISINs for reporting over-the-counter derivatives contracts.
Their concerns included that ISINs did not cover all OTC derivatives, and were not flexible enough to do so. Bloomberg, which runs a competing identifier in the form of the Financial Instrument Global Identifier, also wrote to Hill on January 15, expressing its support for the Isda/GFMA stance and its opposition to the mandated sole use of ISINs.
However, the buyside group described some of the concerns raised in opposition to the use of ISINs as “inaccurate”. It said that the ISIN standard allowed for the identifier’s expansion into OTC derivatives and could be modified to accommodate any instruments. Likewise, it said, the system was capable of being as granular as necessary, and that a working group had been formed to help create a formal framework for assigning ISINs to derivatives.
In a further rebuke to anti-ISIN opinion, the European Securities and Markets Authority, which is responsible for the technical standards mandating their use, went as far as suggesting that fears in some quarters were down to a “fundamental misconception” of the rules.
Olga Petrenko, a senior policy officer at Esma, told Financial News: “ISINs have been used for Mifid reporting since 2007. Plus ISIN codes, while initially developed for equity markets, have been very extensively reviewed in 2013, and the scope has been extended to cover derivatives and trading venues.
“ISINs only apply to the extent that instruments are traded on a venue. For investment firms, if they entered into a transaction on pure OTC derivatives, in the transaction report, the investment firm is not expected to assign an ISIN. It’s expected to explain in a field what its characteristics are.”
She added: “The whole fuss that has been going on is on the lines that Esma has requested ISINs for OTC derivatives. That is not the case.”