Many large trading venues are yet to sign contracts for a new service that allows them to create International Securities Identification Numbers for over-the-counter derivatives – a crucial step for MiFID II reporting requirements that come into play on January 3.
The Derivatives Service Bureau, an industry utility created by the Association of National Numbering Agencies for generating swaps ISINs, has signed up 77 fee-paying users. That includes 66 “power users” that will connect directly for fully automated operations and real-time updates.
Banks, buyside firms and smaller trading venues dominate the initial wave of users, but larger venues that operate numerous multilateral trading facilities and organised trading facilities – a new designation of venue under MiFID II – have stalled over signing contracts.
Venue operators must obtain separate licences for each individual platform to generate its own ISINs. That has not yet happened according to Sassan Danesh, managing partner at Etrading Software, which provides day-to-day management for the DSB. He said that some larger trading venues have so far signed up just one or two entities despite holding initial talks around 10 or 11 entities.
“One possibility is that venues are relying on the fact that instruments they are going to trade have already been created,” said Danesh. “Banks have been mostly engaged in that pre-population work; if the trading venue does a relatively unusual trade on a particular day, it’s not guaranteed that ISIN will exist.”
An open data model means that registered users can access pre-existing ISINs without charge. In addition to the fee-paying users, DSB has registered 74 for no-cost data services. That may be a viable option for venues trading the most vanilla contracts, but they could face reporting compliance issues on contracts that stray into more exotic exposures.
The concern for multi-venue operators is that an open-ended fee structure leaves them in the dark over the final cost of the service until after MiFID II takes effect. As a not-for-profit operation, DSB recovers its costs across all users. As more users join, costs per user fall. The most recent count sees banks footing 60% of the bill, buyside firms 15% and trading venues 25%.
Final fees for the first contract period, which ends December 31 2018, will be confirmed on January 15 and based on the number of contracts signed by January 5.
According to Danesh, overheads for the service come to around €9m annually for the first four years. Even if the total cost was to shared equally among the current power users, that could equate to under €140,000 per user, annually.
While Danesh pointed out that the cost is small compared to the multiple billions raised in annual derivatives trading revenues, he was conscious of the additional costs being levied at an industry facing revenue contraction and a hefty regulatory compliance burden.
“Even if the absolute amounts are not that high, particularly relative to derivatives trading revenues, we understand that a regulatory mandate means people feel they have no choice,” said Danesh.
“We’re trying to provide more transparency and have governance structures in place that allow the industry to provide input, either through public consultations or committees through which users can provide direct feedback. We’re engaging with the industry as much as we can.”
The per-user fee has more than halved since the last count in early November and more firms are expected to sign before January implementation, further reducing costs.
Additional bank users are expected to emerge through the first half of 2018 as the systematic internaliser regime takes effect from September 1. That enables dealers to engage in bilateral trading of instruments that are designated to be traded on a trading venue.
“As the systematic internaliser infrastructure comes into place next year, we’re hopeful it will start to encourage more participants,” said Malavika Solanki, principal consultant at Etrading Software. “We’re continuing to see more requests for contracts and onboarding come through, and with the 66 power users already signed up, hopefully it provides a level of comfort to those that wanted to see the direction of travel.”
Since the service began operations in October, more than 625,000 ISINs have been created. Initial adopters focused on equity derivatives, while FX and interest rate product volumes have increased in recent weeks.
Early performance statistics show that 99% of requests were processed within 220 milliseconds – within the service level agreement that requires 99% of requests to be processed within one second.
