Creating Interest Rate Derivative Products? MiFIR Data Reporting Deadline
If your firm is in the OTC interest rate derivative creation process, an important deadline is looming just after the ‘back to school’ period this September. In September of last year, ESMA published a Q&A document on MiFIR Data Reporting for Interest Rate Swaps, providing an update on how to report the Interest Rate (IR) Term of Contract (Field 41) in the definition set out in Annex 1 of reference data reporting requirements for Rates products under Regulatory Technical Standard (RTS) 23.
This means that as of the 22nd September 2019, creators of OTC IR derivatives will need to more accurately represent the relevant reference data fields in order to comply with regulatory requirements.
As per the Derivative Service Bureau (DSB)’s Technical Note issued 24th June, the DSB has since introduced three key changes relevant to producing the International Securities Identification Numbers (ISINs) mandated for reporting OTC derivative Rates products to ESMA. These changes include:
- Best Practice Publication, with regard to the definition of a standard tenor for reference data reporting purposes, is available in the DSB’s Field 41 FAQ document [https://www.anna-dsb.com/download/dsb-term-of-contract-faq/]
- An integrated tenor calculator to be embedded in relevant product request templates to calculate a consistent Term of Contract for broken-dated instruments
- An open source tenor calculator to facilitate user testing and integration
Since issuing the Technical Note, the DSB has been in receipt of a number of questions from industry participants, specifically with regards to what the expected impact will be, and if there will there be any resulting changes in terms of how users interact with the DSB. This article attempts to answer some of the more prevalent questions.
Background on Field 41
The ESMA Q&A document requested changes be implemented in relation to Field 41, the reference data reporting field for interest rate derivatives products. The aim of the change is to ensure a consistently populated field, in order to be able to better examine the population of OTC derivatives products for cases of potential market abuse.
ESMA’s guidance firstly provided a view on how the data should be populated when the duration of the contract is known, in other words, a "standard" tenor. Secondly, if the tenor is not determined to be of “standard” duration, i.e. is a ‘broken date’, ESMA has provided a specific calculation methodology by which the term of contract should be populated.
The changes to the IR Term of Contract field allow improved identification of ‘forward-starting’ trades, which possess a differing risk profile from that of spot-starting instruments. The input parameters of the calculation will include the effective date and expiry date of the term of contract. It is important to note that the OTC ISIN will be based on the combination of expiry date and IR Term of Contract, plus other standard input and derived attributes. This means that if an effective date is sent to the DSB as part of the message to create the OTC ISIN, it will be used to calculate a broken-dated tenor and will not form part of the OTC ISIN record itself.
At a grassroots level, the changes ESMA are asking for (and that the DSB Product Committee has been focused on) support consistency, but also support a standard methodology for populating Field 41 in order to allow all users, including industry participants, a more harmonised view of transaction data.
Since ESMA produced its recommendations on Field 41, the DSB’s Product Committee and Technical Advisory Committee have been hard at work in order to make ESMA’s Q&A a reality in practical terms. Below are listed some of the more prominent queries the DSB has been receiving due the change:
1. What does ‘standard’ mean and how can it be consistently populated?
The DSB Product Committee has been working to facilitate consistency and help industry determine what a standard tenor should be. In order to determine what is considered as ’standard’, the Product Committee (comprised of industry representatives and trade association members) started with the most obvious use cases and trading examples, followed by the examination of ‘corner cases’ occurring in everyday businesses.
The result of the deliberations have been drawn up in the response to question 4.3 of the DSB’s Best Practice document [https://www.anna-dsb.com/download/dsb-term-of-contract-faq/], which has now been distributed to respective institutions and trade associations for referral. The Best Practice has been devised as a living document that will be continually updated in response to industry queries, even past the 22nd September deadline.
It is important to note that users of the DSB service remain responsible for determining whether a trade was executed for a standard tenor, with the DSB Best Practice document intended to facilitate consistent calculations for broken-dated instruments.
2. When there is no standard tenor in place, how do I access the tenor calculation?
At industry’s request, the Product and Technology Advisory Committees were tasked with creating workflows to support ESMA’s calculation methodology, as it was considered helpful for users if the DSB could facilitate the actual calculation of a tenor in broken date scenarios. Industry specifically requested that the DSB provide consistency of reporting and reduce trade breaks downstream in mapping processes.
As a result, the DSB has introduced changes to the ISIN creation request message that will accommodate the additional fields required to support the calculation. Once a request message is received, either a newly created ISIN will be issued containing the respective tenor, or the user will receive an existing ISIN if a product containing the respective tenor is already in existence.
3. How long is the testing period?
Industry participants in the Product Committee and Technology Advisory Committee felt the need to balance between the desirability of having a longer testing period (thus deploying as late as possible), and giving industry enough time to pre-populate fields ahead of the ESMA deadline. The agreed upon testing stage is therefore taking place over an eleven-week period from 7th July to 22nd September.
4. With regard to data already reported, do I need to create a new ISIN or manage the old ISINs in any way?
Issuance of new ISINs as per the Q&A is only expected for the new instruments that must be reported to the EU’s Financial Instruments Reference Data System (FIRDS) for the first time on implementation date and going forward. The ISINs reported under the requirements of Article 27 of MiFIR that were issued prior to the implementation date of this Q&A and are still live on the implementation date should not be terminated in FIRDS. This approach is noted in ESMA’s press release associated with the Q&A update.
5. Will I still be able to search for an ISIN that was created before the deadline?
The search facility will continue to work for both old and new ISINs after the ESMA deadline of 22nd September. Technical details about the precise workings of each search message type are contained in DSB documentation available here.
6. Can I calculate the tenor on my own?
The DSB has provided the tenor calculation code in an open source manner, so that users will be able to integrate the code into their systems in order to calculate the tenor where transaction is not for a standard tenor. The open source code is published here, with DSB users recently having received a notification with all the details.
7. Are all OTC Rates products subject to this change?
No. Three Rates templates do not require changes to accommodate the updated IR Term of Contract field. Details are in the user notification available here. The three templates are:
- Debt Option
Call to action
With just over 90% of all OTC Rates ISIN-creating institutions having undertaken testing thus far, the DSB is putting out a Call to Action to those industry members involved in the creation of OTC interest rate derivative products. Industry members need to test the new ISIN creation request methodology and the construction of the workflows behind the calculation of a non-standard tenor. It is also requested that users engage with the DSB early on in the process in order to give feedback or provide additional use cases.
As a community we have just under 3 weeks remaining to work together and make this happen.