In a press release issued as Inside Data Management went to press, ANNA DSB said that as of December 7, 77 organizations had signed up for fee-paying subscriptions to its service, with a further 74 registering for its no-cost data services—up from just 29 users reported last month, all of which were paying clients.

However, it seems that organizations—particularly trading venues, which will bear the greatest burden for requesting new ISINs, and will therefore be subject to the highest costs—are signing up only reluctantly, complaining of uncertainty over how much they may end up paying. Indeed, ANNA DSB notes in its statement the “higher than expected proportion of participation by banks (both global and regional), major buy-side firms and smaller trading venues,” admitting that “anticipated participation by larger trading venues has not yet materialized.”

The service will play a key role in trading firms and market operators’ compliance with Mifid II. Regulated markets, multilateral trading facilities and organized trading facilities will have to disclose the reference data—including ISINs—of every financial instrument traded on their venue in transaction reports, which must be sent to local regulators at the end of each trading day.

To request the creation of ISINs for OTC derivatives, trading venues must sign up with the bureau. The service has been open for business since October 2, but with less than a month until Mifid II enters into force, venues refuse to join.

However, despite the recent surge in registrations, Alex McDonald, chief executive of the Wholesale Markets Brokers’ Association (WMBA), a lobby group for interdealer brokers, told Risk.net in November that he was not aware of anyone who has signed up to the service so far. At the same time, three European trading venues told Risk.net they have not yet on-boarded with ANNA DSB.

“It is a pretty terrible document,” says a source at one venue of the body’s commercial terms. “The problem is we are obviously running out of time for the start of Mifid II. My understanding is not a single venue so far has signed up to ANNA DSB for ISINs. Eventually we will be forced to sign up to it, but reluctantly.”

McDonald and the three venue sources all call the contract’s commercial terms “unacceptable” because they include open-ended charges that make the overall cost of the service unknown.

Emma Kalliomaki, managing director at ANNA DSB, acknowledges there have been challenges, but says firms have not signed up to the service because they are not yet prepared at a technical level.

“The pattern has been that the execution of the agreement and transition to [ISIN] production has really been based on the level of readiness of firms to move in that direction,” Kalliomaki says. “The testing environment has been operational since April, and that doesn’t require any contract in place or fees. Therefore, the firms who have that connectivity and are ready to do that transition are the ones that have been more likely and [swifter] to move into the production environment.”

She admits there have been challenges around the fee model and because there will not be certainty on the fees until the beginning of next year. “It creates some challenges with regards to firms signing off internally. I think those same challenges have occurred across the board, but some have been able to act more swiftly for those matters,” she adds.

No Choice

The venues, however, have no choice but to join. ANNA DSB is the only source for them to request the creation of ISINs. If they don’t join, they will be unable to comply with the reference data reporting requirements of Mifid II, and will be fined by their local regulators.

“It is the most bizarre terms of service. It is a cash cow. They are going to be making a lot of money from Mifid II, and there is nothing we can do about it,” says the source at a second European trading venue, while a third likened the situation to having a gun leveled at their heads and being told to sign the contract. All three venues admitted they will eventually have to sign the contract before the start of Mifid II. Two confirmed they had set themselves an internal date for signing the contract, with one saying they planned to sign at the end of November.

In a press release on November 9, ANNA DSB announced it had 29 users signed up to the service, including “the majority of top-tier US and European swap dealers as well as some buy-side and trading venues.”

ANNA DSB will charge fees to three of its four categories of users: “power,” “standard” and “infrequent.” These users will be able to create new ISINs and conduct real-time searches for issued ISINs in the database. The fourth user category, referred to as “registered,” will not be charged to use ANNA DSB but will only receive an archive of ISINs at the end of each day and be able to do manual real-time checks.

The 29 users signed up to the service in November were all “power” users, which is an attractive option for investment firms because—despite not necessarily needing to create ISINs—the category allows them to integrate their own systems and processes with the ANNA DSB’s ISIN engine. This will then allow them to attach ISINs onto post-trade reports or send the information to counterparties to help them complete reporting requirements.

The initial user fee for the 2017–2018 period is estimated at €82,500, and the annual fee is estimated at €65,000, Kalliomaki says. At first glance, €82,500 seems small. However, there are parts of the contract under which fees can quickly escalate, with the second venue source estimating they could pay just short of £1 million a year. If correct, that venue alone could be paying an eighth of the operational costs of running ANNA DSB, which estimates the costs of running the service at €8.8 million a year. The first variable component of the charge is applied per trading venue needing to connect to ANNA DSB. This means if a market operator has multiple MTFs and OTFs to sign up to ANNA DSB, they will have to pay €82,500 for each venue.

“If there is one entity with 10 trading venues, then they would have to pay 10 fees. There is no discount, because it would mean those with fewer venues as well as other users will then have to pay higher fees,” Kalliomaki says.

In Kalliomaki’s example, if a market operator were to run 10 venues, its initial cost to receive ISINs would be €825,000. This charge is also applied if the market operator wishes to register any reporting facilities they have. Some trading venues will also run approved publication arrangements or approved reporting mechanisms. Investment banks are allowed to register with ANNA DSB at their group level, but if they have separate businesses such as asset management, custodial arms or private wealth managers, they would all have to sign separate agreements.

The Cap Doesn’t Fit

Costs will rise if a venue breaches a 50,000 cap on the number of ISINs it needs ANNA DSB to generate per week and a 100,000 cap on the number of search requests. After the cap is breached, ANNA DSB then applies a series of tiered charges increasing with every 10,000 ISINs issued to users every week.

“Venues are trying to get answers on certain issues, such as the arbitrary limit on how many ISINs the ANNA DSB would permit to be created at 50,000 per week, an artificial cap apparently created to generate a private income stream,” says WMBA’s McDonald.

At first glance, again, the 50,000 limit seems reasonable as it offers a large amount of ISINs for a venue to create, and seemingly provides plenty of headroom for venues to create ISINs before breaching the limit. But venues say they will need more than the limit offers almost every week because the code uses the maturity of an instrument as a field to distinguish between different financial instruments. This will mean derivatives that rely on tenors to determine the end date of a contract—such as interest rate swaps—will have to be reissued with ISINs every day because the maturity will change from one day to the next. This could result in venues requesting tens of thousands of ISINs each day alone, says the source at the second trading venue.

“The caps ensure there is no mismatch between fees and usage and all users are paying the same flat fee irrespective of the number of ISINs they need to generate,” Kalliomaki says. “This ensures we have a fair policy across users, which means there cannot be a disproportionate use of DSB’s resources across one user versus another. Actually, for the majority of users this has not been an issue. The number of users who have signed up indicate the thresholds are considered acceptable.”

However, if most of the users signed up so far are investment banks, the cap for requesting ISINs to be created should not affect them. Under Mifid II, investment firms are obliged to send transaction reports to local regulators at the end of each trading day and publicly disclose instruments they trade before and after they transact those, depending on if the trade is below size thresholds and the instrument has a liquid market. However, investment firms only have to fulfil those obligations if the instrument is traded or admitted to trade on a venue—in which case, the venue will already have created the ISIN that the investment firm must report. This means dealers should only be affected by the higher cap to search for ISINs, and not the cap on creating ISINs. Venues will be affected by both caps.

The result of these provisions in the contract means trading venues have no guarantee of how much the ISIN service will cost. “The costs are unknown, so you are having to sign up to something you don’t know how much you will have to pay for,” says the source at the first trading venue.

ANNA DSB responds by saying it is difficult to calculate exact fees before having a complete picture of how many users there will be, estimating that between 100 and 200 organizations will register as power users.

“As an industry utility trying to ensure there is a fair distribution across all firms, it is a challenge; I think it is definitely difficult to do when you don’t have the basis of knowledge of how many users you are going to have,” Kalliomaki says.

Game Theory

ANNA set up the DSB as a not-for-profit utility specifically to create ISINs for OTC derivatives on a cost-recovery model, which means the fees paid by clients will be used to cover the costs incurred by running the service. The governance of ANNA DSB is dictated by requirements set by the International Organization for Standardization (ISO) on the operations of numbering agencies, which includes pricing of services on a cost-recovery basis. ANNA is contracted by ISO to serve as the ISIN registration authority, and ISO is responsible for oversight of ANNA DSB.

A group of four investors—Euroclear, Herausgebergemeinschaft Wertpapier-Mitteilungen Keppler, S&P Global and SIX Financial Information—who provided the funding to develop ANNA DSB also sit on its board. According to a final fee model report published on June 28 by ANNA DSB, the funding will be repaid over a period of four years at €1.4m each year. On top of that, ANNA DSB will pay the investors €320,000 each year in interest payments for four years. Power users are supposed to contribute to a larger share of the cost. If more users sign up to the service, the costs will be revised and the fee per user will decrease; any surplus will be used to reduce fees in subsequent years.

But if fewer users sign up to ANNA DSB, they could increase the fees for 2018. The third source says this also makes them uneasy, as the contract stipulates ANNA DSB can unilaterally alter the fees in the middle of the contract. The second venue source believes the fee structure discourages venues from signing the contract early, because if they wait until after their competitors join the service, it may mean they will be able to negotiate for the revised fees.

The fee model report also provides an example of how fees would change, depending on whether the service has 100 or 200 power users on board. If there are 100 power users, it will charge €65,000, and if the number of users increases to 200, then the initial charge decreases to €38,000.

“We have this first-mover disadvantage because if there are more trading venues that connect to ANNA DSB, then the price dramatically decreases. You end up in a situation where you are thinking to yourself, ‘Do I wait until they have more users to avoid the more expensive version, or do I apply now to get to 100 users and pay out up front?’ If you pay out up front, then your competitor will join later on and never have to subsume the extra cost for being the first mover,” says the second venue source.

Kalliomaki disputes this, as ANNA DSB will use January 5, 2018 as a cut-off date before revising fees for 2018 on January 15, and will not revise fees before January 5.

“If they don’t sign before January, then those numbers aren’t included in the fee determination, so the fee would be higher than if they were to join before January 5; the more users we have, then the lower the fees are. So by not joining before January 5, everybody is being disadvantaged because those numbers don’t get counted in the fee determination using the actual numbers,” Kalliomaki says.

But most venues are still negotiating the contract and consider it a stand-off. If they wait until the last moment, ANNA DSB may be tempted to revise the fees so as to ensure it reaches the target of 100 power users. The second venue source also questions whether the contract being offered to them matches the rationale of a cost-recovery model. Venues face the extra costs for using the service more frequently, yet have in theory already paid for the cost of building the infrastructure in the initial fee.

Indeed, the lack of participation from trading venues has caused ANNA DSB to revise its revenue expectations, with investment banks now projected to cover up to 60 percent of the overhead, and 15 percent covered by buy-side firms and vendors, leaving trading venues contributing as little as 25 percent.

Trading venues can’t avoid using the DSB. But—though the body reports new contracts continuing to arrive—with so little time left, venues will have to move quickly to be compliant on day one of Mifid II.