The tool allows for the generation of an “LEI prefix” of 10 characters, using a 20 character LEI as input. This is part of the scheme outlined by ISDA which is recommended to be used for Unique Trade Identifiers globally under all trading reporting regimes, which is documented here. Under the scheme, market participants generating UTIs (“Generating Party” or GP) prefix the UTI with a 10 character unique code. LEIs are 20 characters long, but characters 7 to 18 uniquely identify the party, which is 12 characters long. However some identification systems (in FX for example) can only handle 10. Therefore the paper recommends using characters 7-16. The problem with this is that using only those characters may lead to a non unique ID being used. The generator can take the full LEI and provide a 10 character prefix that will be unique under this scheme.
ESMA have also published a recommended UTI construction scheme under EMIR, which can be found under TR Answer 18 of the Questions and Answers document. This is referenced under the ISDA scheme as well, although it is slightly different, in that it suggests that the UTI should start with an “E” code. However it does not necessarily mandate this scheme so long as the two parties agree.
Similarly under US rules, the “USI” is required. Again the ISDA paper (and EMIR Q+A) reference this, and state that the UTI should be the USI.
Trades under REMIT also require an identifier that matches from both sides. The Trade Reporting User Manual (TRUM) outlines on page 55 how UTIs should be generated under REMIT, and opens with a statement that the method may be different to other reporting regimes. For bilateral trades, ACER ask that both parties use the same algorithm to generate the UTI. The algorithm will be based on the economic terms of the trade. The benefit of such an algorithm is that in theory it should be possible for both sides to generate the same UTI without exchanging it. The TRUM states that the algorithm is available in Annex IV, although opening the actual Annex displays a document saying that it will be “published as soon as available”.
The TRUM goes on to state that if both parties agree, an alternative method may be used, which could include the ISDA one. The TRUM also states that a list of publicly available methods is shown in Annex V, although clicking on this reveals a list of abbreviations rather than the promised list.
Which scheme to use?
There are differences between all of the schemes, and so in some ways it makes sense to use the one that is recommended by the appropriate supervisor. However, the majority are not mandatory.
At the same time, there are global efforts under way to harmonise the reporting schemes around the world. It is likely that the schemes proposed by financial regulators will be more dominant. It should also be noted that the various discussions around the definition of a derivative in terms of physical forwards could result in trades that are today under REMIT moving into financial regulation.
As a result, it is worth bearing in mind that if there is a choice, using a scheme outlined by a financial regulator is likely to last longer. However, many wish for a solution which is actually mandated, which then removes any uncertainty about the right way forward.