Unique Transaction Identifier (UTI)
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      3. Unique Transaction Identifier (UTI)

      What is the ISDA UTI Waterfall Logic? (Former)

      Note: ISDA has released new guidance referenced here

      Unique Trade Identifier (UTI): Summary of Proposal for determining generating party


      Introduction:

      The discussions and outcomes from the ISDA working group calls focused on the determination of the Unique Transaction Identifier (‘UTI’) generating counterparty – taking place on November 2, 8, and 30 – were held jointly between the ISDA Data and Reporting EMEA Working Group and the ISDA Data and Reporting U.S. Compliance Working Group are summarised below. A separate call was also held with the ISDA AeJ Data and Reporting Compliance Working Group, the ISDA Japan Data and Reporting Compliance WG, and the ISDA Japan Data and Reporting Implementation WG on 21 November which informed some of the final proposals outlined. These ISDA working groups are referred to as “Working Groups” or “WG”.

      These working group discussions include input from both buy-side and sell-side firms, across the U.S., EMEA and APAC regions to promote a globally consistent approach towards UTI generation. This does not constitute legal, regulatory, accounting, tax or financial advice, and each market participant should satisfy itself that following or not following the UTI generating party determination logic set out herein is appropriate to their specific circumstances.


      Background:

      CPMI-IOSCO published Technical Guidance on Harmonisation of the Unique Transaction Identifier (the “Guidance”) which includes waterfall logic for determining the UTI generating counterparty (see Table 1). Global regulators are each adopting a version of this waterfall logic as part of their regulatory reporting re-writes. The cross-jurisdictional step (step 4 of Table 1 in the Guidance) requires a check as to whether one jurisdiction has a sooner reporting deadline and this has been identified as challenging to implement due to: 

      1. a counterparty to the trade needs to successfully identify the jurisdictional scope of the other party it is facing, 
      2. if the two counterparties report to different jurisdictions, where both have the same reporting deadline (e.g. are both T+1 reporting regimes), the counterparties then need to compare and determine which is the ‘sooner’ T+1 regime, and 
      3. the counterparty identified as having the sooner reporting deadline may have a preference for (and have agreed to) the other counterparty being the UTI generator. 

      Therefore, the Working Groups sought to identify a better means of determining the UTI generating counterparty that can be implemented more consistently across jurisdictions. 


      Limitations and challenges with the ‘Sooner deadline’ determination logic:

      • An entity may not always know all the jurisdictions a transaction is in scope for. For example, if a transaction is entered into between two non-US persons but executed in the US by one entity, the transaction is in scope for North America reporting (which would have the sooner deadline) but there is no obvious manner for the other counterparty to determine this. 
      • In sell-side v buy-side transactions, the preference tends to be for the sell-side entity to be the UTI generator, (although there are buy-side entities that opt to be the UTI generator). The ‘sooner deadline’ step in the waterfall logic does not take into consideration whether the parties to a trade are buy-side or sell-side, meaning less sophisticated market participants may end up be the UTI generating party. 
      • APAC jurisdictions have a T+2 reporting deadline and therefore when APAC firms face counterparties in the US, Europe or UK (all with a T or T+1 reporting deadline), they would not be the ‘sooner deadline’ jurisdiction and so market participants in those regions are unlikely to be the UTI generating entity, regardless of the size or sophistication of their client.
      • Bilateral agreements can be put in place to specify which counterparty will be the UTI generator for all transactions, but there are impracticalities surrounding the process of negotiating and implementing bilateral agreements for every counterparty relationship. 

      Proposed UTI generating party waterfall logic:

      The WG applied some assumptions when establishing waterfall logic that would more reliably and consistently determine the UTI generating party:

      • The proposal put forward is unlikely to cover every scenario, but the intention is to achieve a consistent approach across jurisdictions for the vast majority of transactions. Edge cases not covered by the proposed waterfall logic can be raised to the ROC.
      • Where a sell-side entity faces a buy-side entity, the preference is often for the sell-side entity to generate the UTI. However, the WG acknowledged the requirement to factor in the flexibility for buy-side entities to be the generating party.
      • The Guidance is to be followed as closely as possible, and only deviated from where considered necessary to improve the reliability and practicality of the logic to determine the UTI generating entity.
      • The scope of the Working Group discussions were specifically the determination of which entity generates the UTI. The Working Group did not consider additional UTI related items, for example the communication of UTI between counterparties. 
      • The Working Group acknowledge the final proposal does not fully align with the UTI waterfall logic presented by CPMI IOSCO or by regulators, but are working on the principle that the intention is the same, i.e. to consistently identify the entity required to generate the UTI, resulting in a single identifier per transaction that can be applied uniformly across jurisdictions. It is the WG’s believe that the below proposal achieves this aim via a more reliable process. 

      Proposed solution: UTI generating waterfall logic and sell-side letter to clients:

      To address some of the challenges identified above and avoid less sophisticated firms being identified as the UTI generating party, a combination of a modified version of the waterfall logic and a letter for sell-side entities to send to clients was proposed. 

      Waterfall logic 

      1. For cleared trades, the CCP generates UTI.*
      2. For trades executed on a trading venue, the Trading venue generates UTI.*
      3. Cross-jurisdictional check: 
      • If one of the counterparties to a transaction are (i) classified as a Swap Dealer or Security Based Swap Dealer and (ii) are deemed to be the reporting party (RCP) under North America reporting jurisdictions (CFTC, SEC and Canada), then that counterparty is the UTI generator. 
      • For the avoidance of doubt, this determination applies regardless of whether the Swap Dealer or Security Based Swap Dealer actually submits a report under the North America regimes and/or takes advantage of the no action relief. 
      • No other jurisdictional checks are performed.
      1. If the transaction is centrally confirmed on an electronic platform and the confirmation platform generates a UTI, the confirmation platform generates the UTI.*
      2. If there is a bilateral agreement in place, the entity as identified in the agreement generates the UTI*
      3. If the transaction is in scope for the same and single jurisdiction for both counterparties, and where the transaction is between a financial and a non-financial counterparty, the financial counterparty would be the UTI generator. (The specific definitions of a financial and non-financial counterparty are to be applied as relevant to the jurisdiction to which the transaction is in scope for). 
      4. Reverse ASCII sort of LEI’s. The firm with the first ID in when the LEI’s of the two counterparties are sorted in reverse ASCII sort order will generate the UTI.

      * = Step within the CPMI IOSCO technical guidance on UTI. 


      Note. Although bilateral agreement is captured as step 5, it is assumed any such agreements could / would take precedence over the whole waterfall logic. Similar to the CPMI IOSCO technical guidance, this step has been placed towards the end of the waterfall logic. 


      Sell-side letter

      • To assist with a consistent application of the logic for determining the UTI generating entity, the Working Group suggested sell-side firms may opt to send a letter to clients advising that the determination of the UTI generating party would follow steps 1-3 of the waterfall logic proposed above, (i.e. for cleared transaction, trades executed on a trading venue, and where one counterparty is a Swap Dealer or a Security Based Swap Dealer and is deemed the RCP for North America jurisdiction(s)). If none of those conditions are met, the letter would state the sell-side firm will be the UTI generator.
      • Steps 4-6 of the above waterfall are fallbacks if the letter is not agreed by the client or is not sent by the sell-side.
      • The Working Group identified that this letter is not to be considered equivalent to a bilateral agreement as there is no expectation for the letter to be signed. That is to say, negative affirmation will be assumed. If a client were to disagree with the proposal, the parties have the option to negotiate a bilateral agreement. 
      • Sell-side firms should use their own judgement on whether to issue such a letter to clients as well as the content of the letter.

      This document does not constitute legal, regulatory, accounting, tax or financial advice. It reflects feedback received by ISDA from swap market participants (including both dealer and buy-side firms) who, as members of ISDA, participated in the Working Groups, committees and member forums and it is not meant to be binding in any way. As with all guidance and market information that ISDA disseminates, parties are free to choose alternate means of addressing the specific facts of their situation. ISDA assumes no responsibility for any use of this document and undertakes no duty to update it to reflect future regulatory or market developments. Each market participant should satisfy itself that following or not following the UTI generating party determination logic set out herein is appropriate to their specific circumstances.