Taxonomy, UPI and Standardized Products In Plain English.

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Taxonomy, UPI and Standardized Products In Plain English

Transcript of Taxonomy, UPI and Standardized Products In Plain English.

Page 1: Taxonomy, UPI and Standardized Products In Plain English.

Taxonomy, UPI and Standardized Products

In Plain English

Page 2: Taxonomy, UPI and Standardized Products In Plain English.

Introduction

• The Dodd Frank act introduces several new concepts to derivatives processing– Taxonomy:

Identifies the type of product that has been traded (e.g. a simple equity option)

– UPI:Identifies product that has been traded (e.g. a 5Y USD LIBOR interest rate swap) – not necessarily a specific contract

– Standardized Product:A derivative product that has standard terms and is listed on an execution platform.

• All of these are related but are being considered in isolation.

Page 3: Taxonomy, UPI and Standardized Products In Plain English.

How Derivative Trading Is Changing

• Increased use of clearing to reduce risk– Clearing works better if the products are fungible and more

easily netted• LCH survey showed that over 50% of cleared swaps are unique

• Standard products would make this easier– But some standardised derivatives are more fungible/nettable

than others• Similar interest rate swaps can have different term structures

– Some derivatives have already become highly standardised• Especially credit and commodities products

– Will be traded more like a security• Fewer economic characteristics need to be captured

Page 4: Taxonomy, UPI and Standardized Products In Plain English.

Short Term vs Long Term Impact

• Any solution to regulatory reporting must work for the current and future market– There currently exists a very large pool of existing

long dated derivatives which will not change but must be reported

• e.g. Bilateral 30 year interest rate swaps

– In the future more trades will be of standardised products and cleared

• But there will always be some bilateral trades that are custom or not able to be cleared

Page 5: Taxonomy, UPI and Standardized Products In Plain English.

Product Taxonomy

• Tells you what kind of product you have– E.g. IR Swap:Fixed-Float

• Every category needs to be very precisely defined to allow price comparison– IR Swap:Fixed-Float

• One fixed interest stream

• One floating interest stream

• Constant notional, fixed rate and spread

• Not inverse floating or index swap

• No stub periods

• Bucket categories for ‘exotic’ products that don’t match a specific case

Page 6: Taxonomy, UPI and Standardized Products In Plain English.

Deriving Taxonomy & UPI

• Given a source of structured trade data the taxonomy codes and UPI can be derived– e.g. an FpML based trade

• Standardised products can use the same technique but start with a product infoset

• The product taxonomy determines the attributes that will form the UPI

• The full product description combines the taxonomy, UPI and product details

FpMLTrade

Extract/NormaliseProduct

ProductInfoset

DeriveAsset Class &Product Type

Extract KeyCharacteristics

PackageResults

Asset Class &Product Type

Full ProductDescription

UPI

Page 7: Taxonomy, UPI and Standardized Products In Plain English.

UPI: Compound or Opaque?

• The UPI makes it possible to differentiate between similar products– 3M IBM PUT option vs a 6M HP CALL option

• Products with differences in attributes that are not significantly price affecting should have the same UPI– e.g. accrual basis, calendars, date roll convention

• Could either be either:– A compound identifier formed from the key product characteristics

• Parse and add defaults based on ‘market convention’ to recreate the product description

– An opaque identifier allocated from a incrementing counter or a one-way hash function applied to the product description

• MUST always look up the product details via a reference data service to obtain the full description

– Cost to create industry service and changes to client systems to use them will be hugely expensive

Page 8: Taxonomy, UPI and Standardized Products In Plain English.

UPI: Specific or Generic?

• How detailed will a UPI be?– What attributes will be trade specific and what will be

part of the product• Is the strike part of the UPI or the trade?

• The more specific the UPI the greater the number of related UPIs– e.g. LIFFE lists 28 contracts (put/call) for the Dec ’11

option on ARM stock with 14 different strike levels– Ticker

Page 9: Taxonomy, UPI and Standardized Products In Plain English.

Deriving Infosets

OTC Swap Trade

Effective Date

Termination Date

Notional Amount

Notional Currency

Floating Calc Frequency

Roll Convention

Floating Index

Floating Index Tenor

Spread

Floating Reset Freq

Fixing Offset

Fixed Calc Frequency

Fixed Rate

Compounding Method

Payment Frequency

Payment Offset

Accrual Basis

Date Roll Convention

Holiday Calendars

Price Affecting Non-Significantly Affecting

Term

Notional Currency

Floating Calc Frequency

Floating Index

Floating Index Tenor

Floating Reset Freq

Fixing Offset

Fixed Calc Frequency

Compounding Method

Payment Frequency

Payment Offset

Accrual Basis

Date Roll Convention

Holiday Calendars

Trade Values

Effective Date

Termination Date

Notional Amount

Notional Currency

Roll Convention

Spread

Fixed Rate

Trade Infoset Trade ValueInfoset

Product Infoset

Normalize andSeparate Values

Page 10: Taxonomy, UPI and Standardized Products In Plain English.

Relationship With Ticker• Tickers identify real traded

contracts– Have quotes and price history

• If a product is general then need trade facts to identify a specific contract

– Product: 5Y USD/LIBOR-6M Swap (identified by its UPI)

– Trade: Buy next month swap on 10-Nov-2011

– Contract: DEC 2016 USD/LIBOR-6M swap

– Ticker: L6M-DEC16

• Products with same UPI could be listed on different exchanges with different tickers

TradeDetails

ProductDetails

TradedContract

identifiesTicker

Combine

identifies