Coding data underscores health of financial sector

APIR-issued codes take in APIRs as well as Superannuation Product Identifier Number (SPINs) and legal entity identifier (LEIs). They are used by end users, such as platforms, financial planners, managed funds, separately managed accounts (SMAs) and superannuation funds as well as regulatory bodies such as the ATO, to identify assets and enable execution and portfolio valuations. They were introduced in Australia in the mid-1990s and have been issued by APIR since that time. 

In its 27 years of operation, APIR has issued identifiers for over 30,000 individual financial products; 15,000 of which are still actively trading in today’s market. Increasingly, the data recorded by these codes has played an important part in identifying trends and developments within the industry, and in measuring and monitoring activity across all product segments. 

Over the years, the number of financial products registered in the market tends to be consistently strong, irrespective of the market cycle. In fact, for many fund managers, major market upheaval can be an opportunity to launch investments in new financial instruments or to access new investment opportunities.

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Larger asset managers and superannuation funds in particular, that experience significant declines in funds under management, may find that the operating environment results in the reengineering of products on offer. It could also lead to the development of different investment products that better reflect the economic conditions and market trends. 

MARKET VOLATILITY AND FUND REGISTRATIONS

The Global Financial Crisis (GFC) is a prime example of fund registration levels not being adversely impacted by a major market disruption. Product numbers for unlisted financial products were static throughout 2008/09, with no significant declines recorded. While funds under management certainly reduced in some cases, it wasn’t to the extent that large numbers of products were archived or closed. 

There were of course investment products in the market which were effectively quarantined. Equally, however, the GFC provided the opportunity to launch new products into the market, and there were some organisations who did just that during this period. 

The types of product that are launched is dependent on the nature of the market at any one time. In fact, corporate activity, such as mergers and acquisitions, has more of an impact on fund registrations (and closures) than broader economic factors. Industry regulation can also have an impact on product registration numbers. 

COVID-19 IMPACT

COVID-19 has not slowed the growth of funds in Australian and the number of products registered over the past 12-18 months has been significantly higher than the 10-year annual average. 

2020 was also the second consecutive year of 10% year-on-year participant or product issuer growth. Interestingly, much of the growth in product registrations during this time was from fairly vanilla offerings such as traditional equity funds and property trusts.

But the growth of active funds in the market over the past six years has been strong, with more than 600 funds registered to 30 June, 2020; strong registrations have also continued into 2021 despite the impacts of COVID-19. 

While some uncertainty remains for financial markets, particularly with the imminent cessation of the Federal Government’s JobKeeper program, the outlook for new products being issued for the remainder of this year is favourable. 

This not only highlights the strength of the Australian financial services market, but also shows that market volatility is not necessarily the best barometer of whether products enter the marketplace.

CHANGES ABOUND

Despite the strong performance of the Australian financial market and the role that APIR codes play in tracking market trends, there continues to be debate on how the use and accessibility of financial data should be regulated globally. 

Maintaining investor protection in light of changing global regulations, along with the move to cross border investing, has increased the pressure on financial regulators to implement common standards internationally.

While this global harmonisation of financial services regulations – whether intended or otherwise - is seen by many in the industry as an increased compliance burden, it has also facilitated cross border investment, while helping ensure that the regulatory framework is robust. 

There has also been an evolution in the way product and entity identifying systems are used in the financial services industry. Once seen simply as a useful way to categorise and monitor financial products, they are now an integral part of the compliance and risk management framework.

The LEI is a good example. An LEI is a 20-character alpha numeric code that uniquely identifies legally distinct entities that engage in financial transactions. 

The LEI code is associated with certain reference data for each entity, and these codes have been issued to over 1 million entities in more than 200 countries and territories since its formal introduction in 2018. 

The LEI requirement originally agreed by the G20 in response to the GFC and later formed part of the European Markets in Financial Instruments Directive (MiFID II) reporting regime. It has the aim of providing greater transparency for regulators and policy makers in transaction identification across jurisdictions and, therefore, strengthening investor protection for those undertaking a range of transactions.

Initially thought to only impact those based in Europe, it soon became apparent that there were a range of Australian financial services entities - including funds, brokers and traders, as well as trustees of self-managed superannuation funds – that were unable to transact certain OTC derivative investments without an LEI.

While regarded as the globally preferred identifier, until recently, the renewing of LEIs in Australia failed to attract stringent oversight as there was no regulatory requirement to do so. That could be about to change. 

The Australian Securities and Investments Commission (ASIC) has released a consultation paper, CP 334: Proposed changes to simplify the ASIC Derivative Transaction Rules (Reporting): First consultation, proposing an update on rules to require that a current, renewed LEI is the only allowable entity identifier in OTC derivative transaction reporting. 

There is a large depository of data which means when those with an LEI transact, authorities can see where transactions are taking place around the globe. A current LEI is a way for authorities to cross reference transaction activity, so it’s critical that the information is current and accurate. 

According to the consultation paper, ASICs proposal will “require in most circumstances that the registration status of the reported LEI is duly issued and maintained, not lapsed… LEIs are considered a crucial data element for the standardisation of identifying information for the relevant entities in derivative transactions. 

“Further, they are part of a global effort to achieve consistency to allow for global data aggregation. Our proposal aligns with requirements in other major jurisdictions.”

The LEI is APIR’s fastest-growing identifier, issuing over 3,600 LEI since September 2015.

PRODUCT DESIGN AND DIRECTOR OBLIGATIONS – WHAT’S NEXT? 

Target Market Determinations (TMDs) are another requirement for every financial product under the Design and Distribution Obligations (DDO) overseen by ASIC. The objective of the regulations is to place the onus of responsibility on product issuers and platform providers to ensure products are suitable for the market being distributed to, namely retail investors.

TMD distribution and the obligatory communication between financial services participants under the DDO regime have presented Australia’s financial services industry with significant challenges. 

The industry is diligently working to create an efficient communication ecosystem, with APIR proposing to extend its utility function to provide the industry with a central repository for TMDs. 

This will provide relevant stakeholders with a simple one-stop location to distribute and access TMDs; it’s one step towards an efficient industry ecosystem and a healthy product development market.

ASIC has deferred the commencement date for the DDO until 5 October, 2021, and APIR will continue to work with industry stakeholders to deliver a TMD repository that meets the needs of all participants.  

Chris Donohoe is chief executive of APIR Systems.




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