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by Steve Letzler

Related Information

Lehman, for Example

The industry has made significant headway to address a critical data gap that surfaced during the 2008 global financial crisis, hindering regulators and risk managers worldwide in their efforts to identify and manage systemic risk. That gap was the inability to quickly identify the parties to financial transactions across markets.

Now consensus is building globally to resolve this vexing issue by building a legal entity identifier (LEI) system. But what exactly is LEI, and how will it work? What benefits will it provide? Which entities will need to have an LEI? When will it be up and running?

To get answers to those and other questions, @DTCC talked with William Hodash, the DTCC managing director charged with coordinating with global trade associations and regulatory bodies to design a new LEI utility, and Ronald Jordan, DTCC’s chief data officer and the person responsible for leading DTCC’s internal activities and partnering with SWIFT to implement the LEI facilities.

William Hodash, DTCC managing director, Business Development

What is LEI?

The New York Times has referred to LEIs as “unique IDs to help regulators keep track of financial firms.”

“That definition is true as far as it goes, but it doesn’t tell the whole story,” Hodash noted. “The beauty of LEI is that not only will organizations across the globe have unique identifiers in a single format, each identifier will also be accompanied by critical information, core identification data such as address and eventually parental hierarchical data, which will be available in a public database. The ability to access that type of information about all the parties that transact in the financial markets in one place will mark a significant leap forward in terms of transparency and risk management.”

The International Organization for Standardization (ISO) has already established a new draft standard, called ISO 17442, for the LEI, according to Hodash. “The draft standard received unanimous approval from ISO Member Bodies in December 2011, and ISO is now in a very strong position to move toward final publication in 2012,” he said.

Risks posed by lack of data

The first thing to understand is that, currently, there is no single, international standard for a legal entity identifier.

“All sorts of systems are used to identify parties to financial transactions – marketplace identifiers, company registration numbers, tax reference IDs and firms’ own internal numbering systems,” said Hodash, adding that even DTCC uses its own numbering systems for members/participants of its various subsidiaries. “But there is no consistent, single standard that applies globally. And in today’s global marketplace, where systemic risk is a huge concern, that is a problem.”

It is clearly a problem for regulators charged with overseeing a legal entity or monitoring systemic risk who cannot quickly and accurately determine overall risks represented by the activity of a legal entity, unless they know all of its cross-organizational affiliations. The same conundrum faces risk managers at financial firms, who may not be fully and accurately measuring the risks of doing business with different entities without having timely and accurate legal entity information, including knowing which entities are parts of the same organization. And identifying the players in a transaction is just part of the dilemma.

Another issue is determining which jurisdiction controls the subsidiary and the ultimate parent corporation if a problem arises. Currently, it is difficult, if not impossible, to find the answers to these and other questions quickly and easily. Even when firms perform these tasks well, they incur significant duplicative expenses in doing so, with each firm performing similar detailed research and trying to keep the information current.

Ronald Jordan, DTCC chief data officer

Getting ID’d

Any legal entity that enters into financial transactions will be eligible for an LEI. “That would include transacting entities, issuing entities, reference entities, reporting entities, ultimate parent entities and potentially other participants in financial transactions, such as exchanges, depositories, clearing corporations, registrars, regulators and industry organizations,” Hodash said.

The identifier itself will be a 20-digit, alphanumeric code. While it will contain no embedded “intelligence” (i.e., none of the numbers or letters will mean anything), it will have specific data associated with it, such as the exact legal name of the entity, its address, country of formation, LEI status, and other metadata (such as when the LEI was assigned, last changed or disabled).

In the first phase, ultimate parent data will be required, unless restricted by law. Future phases will deal with these legal restrictions and likely include additional information, including immediate parent.

And who will provide the information? “The data for the LEI will be obtained primarily through self-registration by the entities themselves, but the LEI system will also allow for registration by third parties in cases where a company has not yet self-registered and an LEI must be assigned for reporting compliance,” Jordan noted. “Then that data can be validated by the entities themselves and, in all cases, the LEI utility will attempt to validate that information using public sources in over 200 jurisdictions around the world.”The LEI information will reside in a public database, accessible for free.

Getting to LEI

Within the financial industry, calls for a single legal entity identifier standard are not new, but the concept got a big push post-2008.

In December 2010, regulators from around the world met to discuss a “collaborative approach” for building and maintaining a system of LEIs that would meet both regulators’ and firms’ needs.

Shortly afterwards, the U.S. Treasury’s Office of Financial Research (OFR) asked the industry to recommend organizations to implement and operate an LEI solution. In May 2011, a coalition of international financial industry associations and their member organizations released “Requirements for a Global Legal Entity Identifier (LEI) Solution” outlining the industry’s views of the requirements for the LEI system. They then launched a Solicitation of Interest (SOI) process to identify and evaluate potential solution providers for the LEI infrastructure.

After extensive dialogue and due dili-gence, the coalition of trade associations finalized its recommendation to the global regulatory community in July 2011 as follows.

  • The ISO would set the standard for the LEI.
  • DTCC would be the facilities manager, collecting and validating information connected to the LEI and maintaining the public distribution system.
  • SWIFT would serve as the registration authority, registering and assigning LEIs.
  • ANNA (the Association of National Numbering Agencies) would work as a key partner to register, validate and maintain LEIs for issuers and obligors in some of the smaller nations globally.

“While the international industry associations recommended DTCC and the other partners as solution providers for LEI, there still has to be agreement from regulators internationally to support that recommendation,” said Hodash. “In November 2011, the G20 nations formally supported the project at the summit meeting, and assigned the international Financial Stability Board [FSB] to come up with recommendations on the governance, funding and operational models, as well as dealing with data confidentiality and privacy issues and implementation scope phasing. Those recommendations are expected by the end of April, in time for submission to the G20 for its next summit in June 2012. At that point, the regulators and industry will have a road map for the full implementation of the LEI utility across geographies, asset classes and types of legal entities.”

Ahead of the curve

In addition to working with the FSB on the broader road map, the trade associations are working with the over-the-counter (OTC) derivatives regulators and the recommended solution providers on an early proof-of-concept phase of the LEI.

According to Jordan, DTCC will enhance its existing data capabilities and SWIFT will leverage its registration authority platforms to assign an estimated 20,000 or more provisional legal entity identifiers by mid-2012. The assignment of the provisional identifiers is necessary to support regulatory requirements for OTC derivatives transactions in the U.S., which go into effect in July.

The soon-to-be-formed LEI utility also plans to launch a free web portal in mid-2012 to support third-party registration of entities by broker/dealers, trade repositories, vendors and other intermediaries, as well as self-registration by entities themselves and self-validation by the entities of data submitted by third parties. The portal will provide database search and download capabilities.“The portal will be available to market participants, regulators and vendors without restriction,” said Jordan. @