Unique transaction identifiers (UTIs) have been a key element of OTC derivatives reporting for nearly a decade. When used consistently, UTIs allow reported transactions to be tracked throughout their duration. In many cases, however, conflicting jurisdictional rules have meant that more than one UTI is associated with a single trade, depriving regulators of the ability to match trades reported across multiple repositories. New guidance by CPMI and IOSCO aims to solve this problem, offering a harmonized approach for UTI generation that promises to dramatically streamline data aggregation and, for regulators, finally unlock a comprehensive view of the international OTC derivatives market.¹
All this depends, however, on market participants consistently implementing more than a dozen new and sometimes ambiguous rules drafted by national authorities. The goal of CPMI-IOSCO guidance is to ensure that, for a given transaction, only one UTI is ultimately generated and disseminated. Individual jurisdictions still have scope to use their own bespoke waterfall logic for determining the UTI generator, particularly where the transaction is not cross-jurisdictional. Where a transaction is reportable in multiple jurisdictions, the applicable waterfall from the jurisdiction with the earliest reporting deadline should be used.
These waterfalls vary in meaningful ways. Among jurisdictions, the fundamental difference primarily lies in the logic for evaluating which party holds a greater registration-based status under a given reporting regime, a key determinant for deciding the UTI generator. Other differences include the tie-breaker logic that is used when parties are of equal status and the types of CCPs or trading venues that are recognized as potential generators of a UTI. (On this last point, note that It is not always the case that a transacting party will generate the UTI, particularly where the trade is cleared, executed on a trading venue, or electronically confirmed by a confirmation platform.)
In addition, even within jurisdictions, multiple waterfalls are generally provided, contingent on the particular transaction scenario, as per CPMI-IOSCO guidance. For example, the derivatives reporting obligation under ESMA EMIR applies four distinct waterfalls for UTI generation:
- one where the transaction is only reportable under ESMA EMIR;
- another where a cross-jurisdictional transaction is reportable first in Europe;
- a third where a cross-jurisdictional transaction has no earliest reporting jurisdiction; and
- a fourth where another jurisdiction is the earliest reporting jurisdiction.
All this represents a significant departure from the status quo. Only one regulator, the CFTC, has to date enacted harmonized rules for UTI generation. The CFTC waterfall is comparatively straightforward, and given that no other jurisdiction has gone live with their own revised UTI rules, market participants have not yet had to manage the complexities of generating UTIs where the transaction is cross-jurisdictional. That will change next year, however, when other jurisdictions bring online their UTI requirements. That includes Japan and Europe in Q2, the United Kingdom in Q3, and Australia and Singapore in Q4. Indeed, the number of waterfalls will grow further still, as additional regimes finalize their own harmonized UTI rules, such as the CSA, SEC, SFC, FINMA, and FSC.
Further complexity stems from several regulatory ambiguities. Foremost among these is what it means to be the earliest reporting jurisdiction for a cross-jurisdictional transaction. The Regulatory Oversight Committee (ROC) is currently considering three different methodologies for making this determination, with guidance expected to be published within the next few months.
This means that compliance with harmonized UTI standards cannot be solved by implementing a single, omnibus workflow or, as some market participants have suggested, simply relying on bilateral trade agreements. Market participants have effectively been tasked with building and maintaining multiple regime-specific and cross-jurisdictional waterfalls, as well as logic for determining which waterfall applies pursuant to the terms of a given transaction scenario. Moreover, the implementation of this logic will be subject to change over the next few years, both as new guidance becomes available and as additional regimes revise and/or publish their UTI rules.
Many market participants are understandably concerned that the complexity of the cross-jurisdictional rules will make it difficult to apply them consistently, undermining the goals of UTI harmonization. So, too, the fact that several key issues surrounding the UTI generation logic have yet to be resolved necessarily means that, pending the finalization of guidance, the timeline for implementation will be compressed.
Droit’s Solution for UTI Generation
To help market participants overcome these challenges, Droit has applied its patented platform for intelligent decision-making to UTI generation. Droit’s software leverages a firm’s data for reportable OTC derivatives transactions to determine the UTI generating party using the appropriate regime-specific and cross-jurisdictional UTI waterfall logic. Specifically, where a transaction is reportable in a single jurisdiction, the mandate determines the UTI generating party according to the bespoke waterfall logic for that jurisdiction. Where a transaction is cross-jurisdictional, it identifies the correct waterfall according to which regime is the earliest reporting regime.
Droit’s regulatory solutions are built according to a consensus view of how rules and regulations are applied. Firms using Droit’s UTI Generation Mandate will receive updates as industry consensus emerges over issues such as how to determine the earliest reporting jurisdiction, how to navigate cross-border scenarios where some jurisdictional waterfalls have yet to be phased in, and what to do when rules conflict. All decisions are annotated against the relevant regulatory texts and guidance across multiple jurisdictions, ensuring full decision transparency and traceability.
Efficiently manage change
The harmonization of UTI generation will improve transparency for OTC derivatives markets. Nevertheless, compliance with the new rules will be a complex and multi-step process, involving careful management of a number of unknowns and the monitoring of new regulations and guidance over a multi-year period. Droit’s UTI Generation Mandate can help institutions to navigate current and future regulatory changes, helping them to comply efficiently and with confidence.