UPI – Unique Product Identifier Explained

The Unique Product Identifier (UPI) is the long-awaited new taxonomy for better describing OTC derivative products and the various characteristics of how each derivative is structured.

At its simplest level the UPI replaces the current simplistic OTC derivative taxonomy values such as “FX Forward” or ISDA’s “ForeignExchange:Forward” with an identifier mapped to far more granular attributes in a centralised database.

That database is run by ANNA-DSB and much like ISIN codes, will mean that various parties can be sure they are talking about the same OTC derivative because they can look up that UPI in the database and all see the same attributes.

ROCking out with ANNA

Alphabetti spaghetti time for the acronyms.

The ROC gave the mandate to ANNA to establish and run the DSB for UPI.

Clear?

No?

Ok. The Regulatory Oversight Committee (a supranational group of financial market regulators and authorities that amongst other duties oversees the LEI framework) is leading the global rollout of UPI. As well as helping to establish the UPI protocols and taxonomy, the ROC has mandated the Association of National Numbering Agencies (ANNA) with establishing and operating a facility for obtaining and maintaining UPIs. This facility is called the Derivatives Service Bureau (DSB) and is essentially a paid-for service where users can obtain an existing UPI if one already exists or have a new UPI generated if it doesn’t. Think of it as a big centralised Excel spreadsheet that debits your credit card every time you glance in its direction.

Taxonomies? Attributes? What?

This stuff is admittedly hard to visualise so let’s break it down with examples.

Let’s take good old Credit Default Swaps (CDS). Because had they not crashed the world’s economy in 2008 we wouldn’t be here today discussing UPI as part of the remedy for that misadventure.

A firm has a CDS in its systems with various product attributes that describe things like what the underlying asset the CDS is based on and it wants to obtain the UPI for that CDS.

The firm submits a query to ANNA-DSB with various inputs describing the CDS.

The UPI query inputs for a CDS on a corporate bond are shown below:

                                     

ANNA-DSB searches the UPI database to see if a UPI already exists for a CDS matching these various inputs. If no UPI exists, the DSB will assign a new UPI and create a new record in the database for subsequent users to see.

The DSB then responds to the query with the resulting UPI (highlighted) and additional characteristics as shown below.

                                     

Now whenever the firm communicates with another firm, regulator or party they can all use DSB data to know that UPI QZ2093849381 refers to a Credit Default Swap on a European corporate bond with ISIN GB2093849381, with CFI code SCUCCA and issued by LEI 39120071DMHXS09CI766.

So similarly to the LEI where the database maintained by GLEIF means that firms can use an LEI code to ensure that they are talking about the exact same legal entity, the rationale behind UPI is that a central database of products provides clarity that firms are talking about the exact same OTC derivative product.

FX Example

The UPI query inputs and outputs vary based on the asset class and product type.

If we consider Foreign Exchange then, if a firm has an FX Option in its systems and it wants to obtain the UPI for that FX Option.

The firm submits the below query to ANNA-DSB with various inputs describing the various characteristics of the FX Option.

                                       

DSB then responds to the query with the resulting UPI (highlighted) and additional characteristics as shown below.

                                       

Now all parties can use DSB data to know that UPI QZV9SHRJ8KZG refers to an FX Option on a EUR vs USD, with CFI code HFTAVP, that’s a European-style physically settled call option.

Interest Rates Example

Next if we look at interest rates, if a firm has a cross-currency fixed-float swap and it wants to obtain the UPI for that swap.

The firm submits the below query to ANNA-DSB describing the rates swap.

                                       

DSB then responds to the query with the resulting UPI (highlighted) and additional characteristics as shown below.

                                         

Now all parties can use DSB data to know that UPI QZ7M47SKZL15 refers to an cross-currency fixed-float swap on USD vs JPY, with CFI code SRCCCP that’s physically settled.

So UPI is like an ISIN then?

UPI essentially sits between a CFI code and an ISIN in terms of how granular or specific it gets.

The CFI code describes the basic attributes but does not get as far as underlying assets, currencies etc.

Taking the CFI from the previous rates example, we see that SRCCCP is the CFI code for a physically settled, cross-currency, fixed-floating, rates swap.

Diagram below generated using ISDA’s CFI Code Generator:

                 

The UPI takes it to the next level of granularity by telling us this rates swap is also based on USD vs JPY, uses the USD-LIBOR-BBA floating rate and has a six-month period for that reference rate. So the UPI is far more specific than the CFI which just outlines the broad characteristics.

ISIN would take it even further in terms of granularity because ISIN also tends to reference the trading venue where it traded and any venue specific characteristics such as the currency it’s traded/priced in.

Why not just use ISIN?

Two main reasons…

1. The more forgiving reason is that since ISINs are often specific to the trading venues this means that using ISINs makes it more difficult to aggregate products with the same characteristics that are traded on different venues. Given the whole OTC derivative reporting framework is geared towards systemic risk, the regulators want the ability to aggregate transactions at product level, rather than venue level, when examining counterparty exposure. So UPI being venue agnostic is beneficial for this surveillance.
2. The less forgiving answer is that outside of EMIR (EU & UK versions) no other regulators use ISINs for OTC derivatives. EU and UK reporting is therefore the outlier and much like the reporting of Exchange Traded Derivatives (ETDs) that underpins it, the use of ISINs for OTC was widely considered crazy but nonetheless made it into the rulebooks.

So whilst ESMA and the FCA pushed ahead with ISINs for OTC derivatives the remainder of the regulators globally have patiently waited for UPI to be ready as a global solution much like the LEI.

UPI Pay to Play

Unlike LEIs (where the legal entity obtaining an LEI has to pay an annual fee for that LEI but the database and data is essentially free to all), ANNA-DSB will charge users for creating UPIs and accessing the UPI data in general. This is a little more controversial as UPI’s adoption across many of the OTC derivative reporting regimes amongst other use-cases means that many firms will have no alternative other to register with ANNA-DSB and pay for the privilege.

Time will tell whether other cottage industries and resources pop up around UPI data in much the same way as you see a plethora of LEI websites and utilities whenever you search for an LEI these days. I personally hope so because ANNA-DSB needs remuneration for creating and maintaining the UPI services, that much is reasonable. But everyone having to repeatedly pay to access the same data seems a lot less reasonable in the long run.

Similarly to the LEI rollout, we’d expect an explosion of new UPIs at the start (when the CFTC goes live with UPI in January) and another explosion when EMIR Refit follows in April next year. But that growth in new UPI population will theoretically tail off and eventually slow right down where only exotic edge-case UPIs are requested, or UPIs on newly created credit or equity underlying instruments.

Conclusion – The Big Short rerun

The UPI is a good concept in general and, after what seems like a very long time in the making, it is finally becoming a reality. It should help to improve clarity and consistency across the industry and for regulatory reporting in general. However we see a great deal of confusion around what UPI really means and with six months to go until the CFTC UPI go live, this is concerning. 

If the UPI allows various regulators to aggregate similar derivative contracts together to better assess the systemic risk then that can only be a good thing. I’ll happily watch the excellent The Big Short film again but I don’t need to relive the crisis itself. There is clearly a great deal of work ahead to get UPI up and running and fully integrated across many firms and many systems.

Tables (apart from ISDA’s) sourced from ANNA-DSB.

• Still scratching your head over UPI?  For a conversation with Alan or one of our regulatory specialists, please get in touch. 
• Is your firm prepared for EMIR Refit? To find out more about our EMIR Refit Toolkit, please contact us.