Mark Davies, who led DTCC’s legal entity identifier (LEI) activities in Europe prior to being named General Manager of Avox, Limited, a DTCC subsidiary, recently authored an article focusing on DTCC’s leadership role in collaborating with industry partners to develop a global legal LEI solution, which is a standardized method to identify financial parties to a transaction.
“The Legal Entity Identifier: What it is, when it’s due, and what it means” appeared in the January 2013 edition of the Journal of Applied IT and Investment Management. The article provides an overview of LEIs, their history and the business need for a global solution. It discusses the need for standardization and explains how the industry has built international consensus in the drive to coalesce around a new approach and common language.
The article highlights how the U.S. Commodity Futures Trading Commission (CFTC) selected DTCC and SWIFT to implement a utility to assign the CFTC’s Interim Compliant Identifier (CICI), an interim LEI solution. It goes on to explain that while DTCC and SWIFT continue to work with global regulators on the design and implementation of a universal LEI solution, the assignment of CICIs is a key step forward in managing risk in the over-the-counter (OTC) derivatives markets.
The Journal of Applied IT and Investment Management is a financial industry periodical published and distributed globally by SimCorp, which provides investment management software solutions and services for the financial industry. It has global circulation of 23,000.
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It is really a simple concept but it meets a number of needs – assign every legal entity engaged in financial transactions a unique identifier and immediately firms will be able to more efficiently track counterparties to trades, streamline processing capabilities and improve risk management. While financial institutions have long employed internal and public identifiers for these purposes, the lack of a uniform global standard has limited the value of this reference data to enhance market transparency and mitigate systemic risk.
Following the 2008 financial crisis, regulators and industry participants have come to agree on the need to develop a global solution that allows transactions to be tracked across financial markets and multiple jurisdictions. Now that there is widespread support for creating a uniform legal entity identifier (LEI), policymakers are engaged with stakeholders globally to address the challenges and potential obstacles of transforming this concept into reality.
Looking Ahead: Next Steps for the Industry
Developing a standardised method to identify financial parties to a transaction is instrumental in improving transparency, efficiency and risk mitigation in the global marketplace. With an interim solution now in place, what are the next steps?
What should firms be doing? The answer to that depends on what and where funds are invested. If a firm trades OTC derivatives with any organisation that is a major swap dealer or major swap participant regulated by the CFTC, the answer is simple: apply for a CICI.