An automated solution to generating unique trade identifiers (UTIs) for OTC derivatives traded, required by the European market infrastructure regulation (EMIR), will significantly reduce the burden on counterparties, according to trading solutions provider Trayport.
In a whitepaper, the firm said an automated UTI generation system would simplify workflows, but faces significant challenges in being implemented.
Trayport said that, while the implementation of UTIs seems straightforward, for OTC derivatives trades using non-standard contracts and arranged bilaterally this can be more complicated that those arranged on a common platform.
Automated UTI generation would significantly ease this burden, but requires more advanced technology in order to be useful to the market.
“The main challenge to implementing automated UTI generation is the need to standardise base transaction data via an algorithm able to eliminate non-relevant representation differences. The problem to be solved is therefore primarily one of intercompany reconciliation,” the whitepaper said.
It suggests that UTI generation should involve each party submitting a minimal set of mandatory transaction information, with the process triggered by the first submission by a counterparty and consumed by the second.
One the system received the transaction details, it should compute an encrypted hash of the transaction details which are then associated with a UTI.
The system should not need to store sensitive transaction data and, as such, would be secure and not require direct interchange between the counterparties to a trade. The biggest risk to an automated system would be a distributed denial of service attack, but it would be unable to access transaction data and would, at worst, simply lead to a temporary disruption of the service, according to Trayport.
Dan Smith, head of corporate development at Traypower, said: “The ideal UTI solution should be specifically designed to support bilateral and off platform trades. This is where the seller must generate and agree the UTI with their counterparty before reporting the trade. Doing this as close to the point of execution as possible reduces the risk of mismatches and improves operational efficiencies."
EMIR rules will require counterparties to OTC derivatives trades to report their transaction information using UTIs from 12 February 2014, including any outstanding or entered into on or after 16 August 2012.