Identity Crisis

In 2007, the Committee of European Securities Regulators (CESR) started to discuss the introduction of the Alternative Instrument Identifier (AII), to help firms identify derivatives and meet the transaction reporting requirements of the Markets in Financial Instruments Directive (MiFID) (Inside Reference Data, October 2007).

Currently, firms cannot report derivatives transactions admitted to trading on regulated markets where the ISO 6166 ISIN codes are not the industry method of identification. The AII would change this. Chapter 23 of PS07/16, published by CESR in October 2007, stated the new identifier could be used for this purpose.

In February this year, the UK's Financial Services Authority (FSA) announced that September 21, 2009 would be the go-live date for the AII implementation. But in July, the regulator postponed this, and the industry is awaiting the announcement of a new deadline.

Chad Giussani, member of the ISITC regulation business unit and product manager for Trax & information services at Xtrakter, says the announcement was unexpected. "As we wait for the FSA, it is important to note that other countries are already processing transaction reports using AIIs. So we will still go live from September 21 with the processing of AIIs, as other European regulators require them to be reported," he says, adding they were ready to accept AII codes on September 21 prior to the announcement by the FSA of its postponement in July.

Xtrakter, an FSA-approved reporting arm, is going to proceed with the deployment of AIIs for transaction reporting as part of its Trax 2.10 release, alongside TRS, the FSA's own reporting mechanism, and successfully completed testing in July for both the reporting of derivatives using AIIs and the regulatory reporting of complex derivatives.

Firms are not standing still waiting for a new date to be announced. London-based Paul Kennedy, business manager, reference data at Interactive Data, thinks most of the companies that needed to implement the AII have already put into place the measures necessary to comply with new regulations. "Companies that need to file transactional reports with their competent authority such as the UK's FSA or Germany's BaFin, cannot afford to leave these measures to the last minute as they seek to comply with CESR MIFID reporting requirements," says Kennedy.

But although some claim the scope of the ISIN should be extended, as it does not allow for unique identification of all asset classes, the availability of the AII attributes can be crucial in making it the preferred option. London-based Gregg Whitbread, product manager at FOW TRADEdata, a UK-based financial information provider that focuses on futures and options products and already has several clients subscribed to an AII feed, says: "The attributes the AII is constructed from are typically available, and this is not the case with ISIN data."

London-based Martin Sexton, consultant, London Market Systems, says that as the majority of transactions go through the AII exchange, it is unlikely many will want to opt out of the exchange reporting transactions on their behalf. "Even so, organizations with a reasonable understanding of semantics and good instrument models, the deployment of the regulatory requirements should merely involve a simple data formatting exercise," he says.

While the industry awaits a new AII implementation date, data experts emphasize the main goal remains the creation of a unique identifier able to identify any security whether listed or not. Page 7 of the consultation paper issued by CESR on July 22: Classification and identification of OTC derivative instruments for the purpose of the exchange transaction reports amongst CESR members, stated that "mandating all market participants to allocate ISIN codes to all OTC derivative instruments would be an extremely costly and burdensome request. CESR concludes that using ISIN codes for the identification of all OTC derivative instruments is not appropriate."

But not everyone agrees. Frankfurt-based Rudolf Siebel, managing director, head of market and service, at German investment fund and asset management industry group BVI Bundesverband Investment und Asset Management, says given the huge profits investment banks are making from issuing OTC derivatives, he doesn't think the statement on expensive ISIN issuance costs is valid. "We will continue to lobby to make other market participants in favour of using the ISIN code also for the identification of OTC instruments," he says.

"If there were to be a clear guidance by the regulators that the ISINs should be used, I think the relevant national numbering agencies in cooperation with stock exchanges will always be in the position to issue ISINs for on- exchange and off-exchange traded derivatives on a timely bases," he adds.

The stock exchanges have their own business case for the AII. "But I think that in a market increasingly working for cooperation, standarization and automation we need to use a unique identifier for all instruments, and given the lack of practical alternatives the ISIN should be the preferable option," says Siebel.

"Due to this need, we would prefer to have the ISIN also for the stock exchange traded derivatives as well as for the OTC derivatives," says Siebel, adding that in Germany, the largest on-exchange traded retail derivatives market in the world, more than 300,000 exchange-listed derivatives called certificates have always obtained ISINs on a timely basis.

Needham-based Stephen Bruel, research director at TowerGroup, says: "It is important for the OTC derivatives community to continue to build the necessary tools to increase standardization." It seems that whether achieved via industry identifiers, messaging protocols or Financial products Markup Language, standardization remains the end goal for the derivatives community.

The Alternative Instrument Identifier - composed of six elements

- ISO 10383 Market Identifier Code (MIC) of the regulated market where the derivative is traded

- Exchange Product Code (code assigned to the derivative by the regulated market where it is traded)

- Derivative Type (identifying whether the derivative is an option or a future)

- Put/Call Identifier (mandatory where the derivative is an option)

- Expiry/Delivery/Prompt Date (exercise date/maturity date of a derivative)

- Strike Price (mandatory where the derivative is an option)

Source: FSA.