New standards for green finance just published

An over-the-counter derivative is contract agreed between two parties which is not conducted over a regulated exchange or trading venue. A derivative is a financial instrument whose value is derived from the performance of the underlying asset, such as a shares, currencies, interest rates and commodities.

Derivatives are used by firms as a risk management strategy, used to hedge business risks, with the aim to protect a company’s finances from risks it may be exposed to. They are also used for speculation, which involves attempting to make a profit on educated estimates on market activity.

Following the financial crisis of 2007-2008, a lack of transparency in OTC derivative markets was identified as one of the key issues. G20 Leaders agreed at the Pittsburgh Summit in 2009, as part of a package of reforms to the OTC derivatives markets, that all OTC derivatives transactions should be reported to trade repositories. Trade reporting, by providing authorities with data on trading activity, is key to identify and address financial stability risks from OTC derivative markets.

The Unique Product Identifier (UPI) is being introduced as a mechanism to identify OTC derivatives products to assist G20 regulators to aggregate global OTC derivatives data by either product or UPI reference data element, together with the Critical Data Elements (CDE) and Unique Transaction Identifier (UTI). This will provide regulators with an improved, consistent view and common understanding of systemic OTC derivative risks.

There are a number of ISO standards working in concert with the aim of improving the quality of data used in financial data reporting, improving the ability to monitor financial risk, and lowering regulatory reporting costs through the harmonization of these standards across jurisdictions. The ISO standards working with the UPI are Legal Entity Identifier (LEI), Unique Transaction Identifier (UTI), Critical Data Elements (CDE), Classification of Financial Instrument (CFI) and International Securities Identification Number (ISIN). Additionally, through the ISO development processes, these standards continue to evolve as the stakeholder use evolves ensuring the standards remain fit for purpose.