Golden Copy: Maybe It's Not a Tale of Two Identifiers

The Big Short won an Oscar on Sunday, and the film has gotten a lot of praise in the media for rendering accessible the complexities behind the financial crash of 2008. Not everyone liked the movie, though. Commentators who work in finance are defensive about its moral message (bankers' greed destroyed the economy) and have criticized its depiction of the role of synthetic derivatives in the crash as exaggerated.

Personally, I enjoyed The Big Short, though it works better as an "edutainment" primer on the crash than as a movie, since it spends so much time explaining collateralized debt obligations and credit default swaps that there's not much time left for character arcs.

What the movie and its critical reception did make clear was that derivatives have gotten some bad press, and this has not been helped either by the complexity of the instruments themselves or by the opacity of the institutions that trade in them. This means that officials all over the world have made a point of regulating derivatives since the crash, or at least loudly calling for their regulation, and they have to be seen to be enforcing this. In Europe, over-the-counter derivatives now fall under the purview of the Markets in Financial Instruments Directive (MiFID II), which is scheduled to go live in January 2018.

Now, in order to regulate a thing, you have to be able to talk about that thing and have others know precisely what you are talking about when you talk about it. And that is why, lately, a debate has been raging around the arcane and—to the uninitiated—perplexingly dull issue of the use of International Securities Identification Numbers (ISINs) for identifying derivatives for reporting under MiFID II. "Raging" is perhaps an exaggeration, since the debate is playing out mostly very politely in study groups, at industry events, on blogs and in trade publications such as Inside Reference Data, among a handful of cognoscenti.

The European Securities and Markets Authority (ESMA) has gone with the ISO-backed ISIN despite objections from market participants during consultations on the subject, probably because it's keen to stick to ISO standards, and not, as some have suggested, because the regulatory agency doesn't know what it's doing. But some market participants argue that ISINs are not fit for purpose for identifying boutique instruments such as options, swaps and futures.

Among these critics is Bloomberg's Open Symbology team, which has posited the Financial Instrument Global identifier (FIGI) as an alternative. Some in the industry are framing the issue as a contest between the two codes.

What hasn't been discussed as much is the use of the codes beyond reporting. What do users themselves want? I have heard the point made that there isn't a lot of difference between the ISIN and the FIGI—conceptually, both are anachronistic.

What is needed for OTC derivatives identification is a genuine alternative that would not only satisfy regulatory imperatives, but also aid price discovery. In addition to offering a view of enterprise and systemic risk, identifiers can also provide a view of liquidity. There have been other efforts by industry bodies to discuss identification for derivatives, and representatives from these organizations are also helping to develop the ISIN. If these efforts and discussions are framed by considerations broader than MiFID II, these identifiers could contribute to the sustainability of the market itself.