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While trade repositories, mandated through the European Market Infrastructure Regulation (EMIR) in Europe and the Dodd-Frank Act in the U.S., will make sure that transaction data is captured across all derivative asset classes, the creation of a unique legal entity identifier (LEI) by an authorized Local Operating Unit (LOU) will make the entities involved in those derivatives transactions consistently identifiable to regulators and other financial institutions. Market participants will not only have a clearer and more consolidated view of their interconnections and risks, but they will also benefit from reduced costs for collecting, cleaning, and aggregating data, and reporting that data to regulators.

The development of the global LEI system is currently underway. In late July, the LEI Regulatory Oversight Committee (ROC) published requirements for LOUs to meet in order for their LEIs to become globally acceptable for transaction reporting to all regulators in all jurisdictions. This is a major step forward for the success of the overall global LEI system in that it makes sure that a single LEI will be used for each distinct legal entity in transaction reporting by all financial institutions around the globe.

In the U.S., the use of a pre-LEI to meet Dodd-Frank trade reporting requirements is fully operational for OTC Derivatives.1  Since the Commodity Futures Trading Association (CFTC) mandated the use of identifiers for trade reporting by April 10, 2013, prior to the availability of a global LEI, a short term solution, known as the CFTC Interim Compliant Identifier (CICI), was created by DTCC and SWIFT [see Regulatory Oversight Committee Endorses CICI Utility Developed by DTCC and Swift as a Globally Accepted Pre-LOU].

How it works

The CICI Utility works within a federated operating model with other LOUs.2 Authorized LOUs issue LEIs that will be accepted for use in regulatory reporting worldwide. Consequently, any globally accepted LEI can be used to report to any regulator that is part of the system. The use of LEIs will become widespread in Europe once the requirement to report derivatives transactions to ESMA-approved trade repositories becomes mandatory beginning on January 1, 2014. LEI use in Asia is moving forward as well with trade reporting rules being implemented in Hong Kong and Singapore and already implemented in Japan.

While great progress has been made in implementing a global LEI, important differences in trade reporting obligations still remain. For CFTC global trade reporting, the buy-side can delegate their transaction reporting obligation to their dealer and provide them with their CICI. In contrast, ESMA’s draft technical standards state that the reporting obligation rests with both counterparties, and that each reporting counterparty must provide an LEI. Thus, the regulatory requirements in Europe highlight to all market participant, not just dealers, the importance of taking the necessary steps to enable LEIs to be embedded in their trade reporting processes. Furthermore, with EMIR reporting requirements for OTC derivatives less than six months away, market participants need to ensure that the preparation process is well underway. With jurisdictions implementing reporting regulations according to different timelines and guidelines, it is anticipated that global reporting standards and practices will take time to converge. However, the use of LEIs will provide a much-needed level of consistency to aggregation of trade information globally, serving as a key pillar of risk management for regulators and market participants alike. The CICI Utility is committed to continue to evolve to meet future standards agreed by the ROC and to work collaboratively with other LOUs to make the global LEI System successful.

1 Pre-LEIs will transition to LEIs and pre-LOUs will transition to LOUs when the Global LEI System is fully operational.

2 Before the full global system is launched these are labeled pre-LOUs.