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.
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
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
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
Deriving Taxonomy & UPI
• Given a source of structured
trade data the taxonomy codes
and UPI can be derived
FpML
Trade
Extract/
Normalise
Product
– e.g. an FpML based trade
Product
Infoset
Derive
Asset Class &
Product Type
Asset Class &
Product Type
Extract Key
Characteristics
UPI
Package
Results
Full Product
Description
• 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
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
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
Deriving Infosets
Trade Infoset
Trade Value
Infoset
Product Infoset
OTC Swap Trade
Trade Values
Price Affecting
Effective Date
Effective Date
Term
Termination Date
Termination Date
Notional Amount
Notional Amount
Notional Currency
Notional Currency
Floating Calc Frequency
Roll Convention
Normalize and
Separate Values
Notional Currency
Floating Calc Frequency
Roll Convention
Floating Index
Floating Index
Floating Index Tenor
Floating Index Tenor
Spread
Spread
Floating Reset Freq
Floating Reset Freq
Fixing Offset
Fixing Offset
Fixed Calc Frequency
Fixed Rate
Fixed Calc Frequency
Fixed Rate
Compounding Method
Payment Frequency
Non-Significantly Affecting
Compounding Method
Payment Frequency
Payment Offset
Payment Offset
Accrual Basis
Accrual Basis
Date Roll Convention
Date Roll Convention
Holiday Calendars
Holiday Calendars
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
•
Trade
Details
Products with same UPI could
be listed on different exchanges
with different tickers
Product
Details
Combine
identifies
Ticker
identifies
Traded
Contract