The multinational response to the 2008 crisis had operational consequences beyond the headline reforms aimed at strengthening financial stability. A case in point is a trade reporting rule, which in turn led to the Unique Transaction Identifier (UTI) standard, initially to bring transparency to an over-the-counter market trouble spot.
By January 2018, nearly a year after the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) set out technical guidance for “harmonization” of the UTI, a Financial Stability Board (FSB) report on governance arrangements recommended that the standard be implemented no later than 2020.
Despite the good intentions of trade repositories and the backing of the Depository Trust & Clearing Corp. (DTCC) and other infrastructure operators, it’s still a work in progress.
International Swaps and Derivatives Association CEO Scott O’Malia cited “widespread” challenges in the regulatory implementation of trade reporting: “The rules have often been inconsistent, duplicative and costly to implement, leading to inaccuracies, repetition and omissions in reported data,” as stated in an October 30 DerivatiViews post.
The UTI standard (ISO 23897:2020) is a 52-character alphanumeric code generated by one of the two counterparties in a trade. In addition to promoting efficiency, the identifier prevents settlement fails because it incorporates and references all the relevant messaging.
Rich Robinson of ISITC
While the global coordinating bodies were responsible for the standard, they did not designate a single entity to administer it. The DTCC and others in practice stepped into that role, and multiple approaches have resulted.
Rich Robinson, chair of the capital markets standards organization ISITC, recalls that there was general agreement early on about the value of a single identifier for the full transaction lifecycle. It would “theoretically simplify things,” he said. “In discussions with regulators, the question was which ID to pick at the very beginning that would become that unique ID for all involved in the transaction chain.”
It was a “waterfall” approach, as Robinson called it, where the first entity to create an identifier would have that designated as the UTI. Because other parties, including executing brokers or managers finalizing block trades, had different waterfalls, additional effort was necessary to arrive at a standardized UTI.
“There are some tacit agreements, but more work needs to be done to make attribution of a unique transaction identifier more clear to all parties and remain useful for regulatory and trade management purposes,” Robinson said.
Adoption of the UTI Is uneven, depending on the asset class and applicable workflows, according to Robinson. UTIs are embedded in the European Market Infrastructure Regulation (EMIR) and Securities Financing Transactions Regulation (SFTR) as well as Dodd-Frank reporting requirements.
“For example, DTCC’s CTM and Settlement Instruction Manager can generate and carry UTIs at block and allocation level,” Robinson noted, “then persist them through post-trade processes, which demonstrates end-to-end feasibility at scale. Overall, readiness varies depending on firm architecture and market structure.”
According to the Swift financial messaging cooperative and the European Securities and Markets Authority (ESMA), 5% to 10% of equity settlements fail, and 2% to 4% of bond trades fail. This amounts to billions of dollars in costs and fees and impacts securities lending and repo markets.
Val Wotton, managing director and global head of equities solutions, DTCC, points to the benefits of efficiency and accuracy.
Val Wotton of DTCC
“Firms are increasingly understanding and reaping the benefits of the UTI, including accurate data sharing, reduced risk and greater operational efficiency and transparency in post-trade processing,” he stated. “At the same time, the UTI is a key component for firms as global markets transition to accelerated settlement cycles.”
By making it possible to track transactions across multiple entities and systems, the UTI mitigates the risk of failed or delayed trade settlements. Wotton says that assigning a UTI early in the transaction chain “enables participants to track transactions more effectively through the entire lifecycle and with greater confidence.”
Transaction-processing intermediaries using the UTI as a reference include executing brokers, prime brokers, global custodians and sub-custodians, Wotton observes. Once assets are allocated after a trade is completed, if there are issues with the trade, the UTI makes it easier to create a case or manage workflow.
ISDA chief O’Malia expressed support for an ESMA proposal “to clearly delineate reporting by instrument type, with exchange-traded derivatives reported under MiFIR [the Markets in Financial Instruments Regulation], over-the-counter derivatives under EMIR and securities remaining under SFTR.
“We also support the removal of the dual-sided reporting model to align with other jurisdictions where only one party is required to report a trade . . . And we’re strongly in favor of the removal of unnecessary or duplicative data fields,” as in cases where information is already available to regulators by way of “legal entity identifiers and unique product identifiers.”
ISDA Chief Executive Scott O’Malia
ISDA’s Digital Regulatory Reporting solution “has transformed industry-agreed interpretations of eight sets of reporting requirements across different jurisdictions into unambiguous code, resulting in significant efficiencies and increased accuracy,” O’Malia pointed out. “As policymakers work to improve their reporting regimes, we will make sure the ISDA DRR evolves to keep pace with those developments.”
The EU’s Central Securities Depository Regime (CSDR) assesses cash penalties for settlement failures. The UTI helps reconcile post-trade settlement positions and handle trade settlement claims to lessen these penalties.
The UTI “reduces pre-settlement exceptions, accelerates reconciliation, cuts settlement mismatches, and improves auditability and traceability,” ISITC’s Robinson said.
Fewer settlement fails, reduced penalties, time savings and smoother straight-through processing help make the business case for the UTI.
Standardization can also support infrastructure innovations, such as shorter “T+0” settlement schedules and tokenization, with end-to-end tracking, audit trails, cross-platform and even cross-chain reconciliation, according to Robinson.
“UTIs provide a path for post-trade efficiency, particularly with shortened settlement cycles,” says an article posted by DTCC, Making the Case for UTI Adoption. “But transaction visibility is a collective action problem, and for UTIs to best work, industry-wide collaboration is needed. While firms are beginning to tackle UTI adoption, more work is needed to discuss gaps in protocols and market practices.”
“The ability to improve matching and settlement rates is crucial, especially with the recent unprecedented volume,” said John Heliotis, DTCC director of product management. “The ability to resolve quickly will continue to be more critical in the future, leveraging one single point of identification that everyone can look through.”