Recently, the International Swaps and Derivatives Association (ISDA) released their, a place where any entity that requires a unique trade identifier (UTI) can check or obtain their unique 10-character prefix generated from their LEI to be used in UTI creation. This move by ISDA attempts to help industry participants, by providing a standard methodology for UTI creation, tackling the trade reporting breaks and mismatches that exist today due to lack of industry data standards.

So what is a UTI?

Under the European Market Infrastructure Regulation (EMIR), both parties to a trade are required to report extensive details of that trade to their chosen Trade Repository (TR). The repository will, in turn, run a reconciliation to match each counterparty’s trade reports using a UTI. Both parties must have agreed, in advance, a common UTI. Different regulators have differing methodologies for the creation of UTI’s and stipulate varying maximum lengths. While Dodd-Frank Act (DFA) defines a maximum length of 32 characters, EMIR allows a maximum of 52 characters.

How is a UTI generated?

UTI’s can be split in to two distinct parts; UTI Prefix (unique to the UTI generating party); and an internal unique transaction identifier.

Initially, the preferred approach to create a UTI prefix was to use the 20 character LEI, however through industry discussions it quickly emerged that most FX systems were only capable of holding a 10 character prefix. Consequently, ISDA’s best practice guidelines for UTI creation advocated using a 10 character (characters 7 – 16 of the LEI) UTI prefix extracted from the generating party’s firm specific Legal Entity Identifier (LEI)[1].

However, in 2014 it became apparent that Local Operating Units (LOUs)[2] were sequentially generating LEIs, causing the generated UTI prefix’s to no longer be unique. Although there is no global standard for the UTI creation, ISDA has worked with market participants in an attempt to create a standard. ISDA now recommends industry participants algorithmically derive 10 characters for the UTI Prefix to ensure uniqueness. UTI’s can then be checked for uniqueness or uniquely created using the new ISDA website:

Who generates the UTI?

 UTI requirements present the question, how do two counterparties to a trade ensure they are both following the same methodology and reporting the same UTI for each trade? There are three approaches currently used within the industry to determine who generates the UTI:

  1. The UTI is generated by a 3rd party and relayed back to the other two parties.
  2. Both parties to the trade have bilaterally agreed a common methodology for UTI creation and both have the same information to be able to create the same UTI.
  3. Both parties to the trade have agreed bilaterally that one of them will create the UTI and communicate this to the other party.

The ISDA guidelines recommend approach 1 and 3. Where a suitable 3rd party already exists, both parties should obtain the UTI from the 3rd party. In the event a 3rd party does not exist, both parties must agree who will be responsible for creating the UTI and they must ensure they both use this UTI for reporting.

However, due to reporting timeframes the UTI may not have been generated nor communicated by the time a trade needs to be reported. In this case, counterparties report using their own UTI, until such time that the counterparty’s UTI is made available. This causes a tremendous number of reporting breaks as the trade repositories are unable to match and reconcile which two trades go together. It also re-introduces confusion over who is the generator of the UTI.

How are UTI’s communicated?

Once the UTI generating party has been confirmed, there are four approaches described as best practice[3] to communicate the UTI between parties:

  1. Centrally executed – execution platform generates and communicates at point of trade
  2. Affirmed – affirmation platform generates and communicates at point of trade affirmation
  3. Matching – matching platform generates and communicates at point of trade matching
  4. Paper trades – UTI generated and communicated on the trade confirmation

Typically new processes take time to settle down as industry participants become more familiar with new practices. In this instance it is more critical than ever that industry participants understand and adopt the standards that ISDA and its members are driving to tackle the trade reporting breaks and mismatches that exist today. Both how a UTI is created; who creates it; at what point in the process; and how it is communicated between counterparties requires all industry participants to be following the same standards. Developing infrastructure internally to support, validate and persist the UTI based on the industry standards will be essential. Equally working across historical departmental boundaries (Trade Capture, Middle Office, Confirmations, Transaction Reporting, Collateral etc) to optimise the process, minimise duplication, reducing the need for additional reconciliations, will be vital to ensure efficient, accurate and timely regulatory trade reporting.

[1] The LEI is a 20 digit alpha numeric string that uniquely and globally identifies an entity.

[2] LOU’s are official bodies authorised to issue LEIs.

[3]The ISDA guidelines were extracted from most recent UTI Best Practice publication document from the ISDA website.