ISDA/FpML Product Identity and TypeAndrew Paul Parry

Apr 2013

Agenda

• Executive Summary

• ISDA EDD 2011 Product Identity and Feature Tags

• Implementation: Structure and Values

• Product Definition, UPI Generation

• Unique Values per Product, UPI Generation Alternative

• CFTC: FX Feature, Narrow Index, Strategy, High Delta

• Appendices: ISDA Product Identity and Feature Tags

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Executive Summary

• Product Identity and Type are important for both Business and Regulatory reasons, because they allow us to understand the possible economic effects, and how these are being used

• We firstly need an implementation approach to comply with CFTC Part 43 and Part 45 for bespoke and complex products by 30 June 2013

• Unique Product Identity (UPI) will satisfy Regulators and avoid use of ISDA Product Taxonomy (Classification) as a proxy for UPI

• Bespoke and complex Products will be reported using a Generic Product, which contains key economic facts applicable to many Product Identities

• This proposal implements ISDA EDD 2011 Product Identity and Type, which are used for UPI generation, as a step towards full Electronic Publication

• We are not implementing Risk Allocation, or any other parts of the ISDA EDD 2011 Definitions, which will be covered in future phases

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ISDA EDD 2011 Product Identity and Feature Tags

Tier Classification Feature (Tag Name)Product Identity Tags

Tier 1 FeaturesED Transaction Type

Matrix Feature

Market FeatureParty Feature

Tier 2 FeaturesED Leg Type

Primary FeaturePerformance FeatureUnderlier Feature

Product Feature Tags

Tier 3 FeaturesEO Convention

Settlement Feature

Valuation Feature

Dividend Feature

Tier 3 FeaturesDate Convention

Variable Feature

Tier 3 FeaturesDesignated Features

Convention

Option FeatureOption Style FeatureOption Type FeatureAdditional Obligation Feature

Tier 3 Features[TBD] Convention

Linkage Feature

Risk Allocation Tags

Tier 3 FeaturesRisk Allocation

ConventionEE Trigger Feature

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Product Identity Tags

Matrix Feature

Market Feature

Party Feature Primary Feature

Performance Feature Underlier Feature

IndxVarSwp-1 OM AllParties Swap Accumulator Derivatives Contract Basket

IndxVarSwp-2 Client Option Barrier Index Basket

IndxVolSwp-1 Interdealer Forward Best Performing Mixed Basket

IndxVolSwp-2 Binary Multi Exchange Basket

Conditional Multi Exchange Index

Correlation Security Basket

Covariance Single Derivatives Contract

Decumulator Single Exchange Index

Dispersion Single Security

Equity Performance

Single Multi Exchange Index

Out Performance

Range

Under Performance

Variance

Volatility

Worst Performing

Implementation: Structure, Values

• Implementation follows the Specification you have seen on the previous slide, using Hierarchy (Tiers), Sets of Names, and Sets of Values for each Name

• Structure: Hierarchy• Transaction Type: Top Level• Leg Type: One to many Legs• Convention Type: (Settlement, Valuation, ...)

• Structure: Set of Names• Set of Product Identity Tags (Matrix, Market, Party, Primary, Performance, Underlier)• Set of Product Feature Tags (Settlement, Dividend, Valuation, ... Linkage)

• Values: Set of Values for each Name• Example: Primary Feature(Swap, Option, Forward)

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Product Definition, UPI Generation

• Product Definition file with Product Identity and Feature Tags

• Generate UPI from Product Definition file using a Hash Function (SHA1)

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Unique Values per Product, UPI Generation Alternative

• Index Variance Swap on previous slide used ISDA 2011, which ensures a unique set of values by assigning each Product a unique Matrix Feature

• We always need a unique set of values to ensure we can generate a UPI, however the Hash Function (SHA1) approach only understands raw text, including whitespace, carriage returns ... instead of the business values

• An alternative approach to UPI is “globally unique identifiers” or UUID, which is associated with each product definition file. This approach is well supported in both databases such as Oracle and IBM DB2, and programming languages such as Python and Java

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CFTC: FX Feature, Narrow Index, Strategy, High Delta

• We have identified additional required features during our analysis to comply with CFTC Part 43 and Part 45 for bespoke and complex products

• FX Feature: Quanto, Composite or Cross-Currency, both on Product Definition and Transaction to support CFTC and SEC Regulation

• Narrow Index: We need Index Transactions tagged “Narrow” or “Broad” according to CFTC and SEC Regulation

• Strategy: Regulators care about economic effects, regardless of how they are achieved, so Strategies such as Put/Call Combo are in scope

• High Delta: How do we define “High” ? Do often do we report ?

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Appendix: ISDA EDD 2011 Product Identity Tags

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• Black text terms are from original publication of Main Book

• Red text terms are from Appendix 2.0

• Green text terms are from Appendix 2.1

Product Identity TagsMatrix Feature Market Feature Party Feature Primary Feature Performance Feature Underlier FeatureIndxVarSwp-1 OM AllParties Swap Accumulator Derivatives Contract Basket

IndxVarSwp-2 Client Option Barrier Index Basket

IndxVolSwp-1 Interdealer Forward Best Performing Mixed Basket

IndxVolSwp-2 Binary Multi Exchange Basket Conditional Multi Exchange IndexCorrelation Security Basket Covariance Single Derivatives ContractDecumulator Single Exchange Index Dispersion Single Security Equity Performance Single Multi Exchange IndexOut Performance RangeUnder PerformanceVariance Volatility Worst Performing

Appendix: ISDA EDD 2011 Product Type Tags

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• Black text terms are from original publication of Main Book

• Red text terms are from Appendix 2.0

• Green text terms are from Appendix 2.1

Product Type Tags

Settlement Feature Valuation Feature Variable Feature Option Feature Option Style Feature Option Type Feature Dividend FeatureAdditional Obligation Feature Linkage Feature

Adjustment ADTV Limitation Conditional ED Leg Automatic Exercise American BespokeOptionType Cash Settlement of Non-Cash Dividends Exchange Amount Linked Calculation Date

Cash Settlement Averaging Forward Starting Automatic Exercise Cancellation Bermudan Call Deemed Relevant Dividend Equit Premium Linked Cancellation and Payment

Electable Settlement Floor Include OET Events Early Exercise Notice Bespoke Option Style Collar Dividend DvP Equity Pre Payment Linked DvP Settlement

Net Physical Settlement Knock-in OET All Linked Legs Early NAE Notice European Put Dividend Index Correction Fee Obligation Linked DvP/Net Physical SettlementPhysical Settlement Knock-out OET Designated Linked Legs Knock-in of Exercise Dividend Recovery Linked Net Physical Settlement

Multi-Valuation Split Notional Accrual Knock-out of Exercise Include Dividends Linked Pricing Date

Observation Non-Forward Starting Multiple Exercise Physical Settlement of Non-Cash Dividends Linked Settlement DateSingle Valuation Single Exercise Single Relevant Dividend TypeVariable Obligation SwaptionVAR ValuationNo Variance CapVariance CapNo Volatility CapVolatility Cap