Many people in the market seem to have a misunderstanding about what ISINs (International Securities Identification Numbers) are, how they work and what they can be used for. That misunderstanding has now become critically important because ESMA has decided
to recommend to the European Commission and the European Parliament that the use of ISINs should be mandated for the transaction reporting of all relevant financial instruments defined in MiFIR, the EU's Markets in Financial Instruments Regulation. It is
not clear at this point that ESMA fully understands how ISINs work either.
This may seem like an odd statement to make, but an ISIN is not really an international securities identification number. For a start, the standard is not just intended for securities, and as financial markets are a regulated environment, it's important
that we use terms that the regulations and the regulators use themselves, otherwise we run the risk of increasing compliance problems. Take a look at a regulatory handbook, such as that produced by the UK FCA, and you'll find there what regulators consider
to be a "security". Derivatives aren't classed as "securities", and yet ISINs can be used for exchange-traded derivatives and benchmarks. So ISINs are not just securities identifiers. And they are not just made up of numbers.
Most importantly, the ISIN Standard (ISO 6166:2013) does not specify anywhere what characteristics of an instrument need to be checked before an identifier can be allocated to that instrument and that instrument alone. While the global LEI standard enables
the creation of an identifier that is unique to an individual entity, ISINs are not necessarily unique to an individual instrument.
What ESMA wants from an identifier may not be what investment firms and trading venues need themselves, and mandating the use of only ISINs may result in additional compliance overhead and costs for market participants.
(Chris Pickles is an independent consultant and a member of the Open Symbology Team at Bloomberg)