Mark Steadman, Executive Director, European Head of Product for DTCC Deriv/SERV LLC
The DTCC’s Global Markets Entity Identifier Utility (GMEI Utility) has issued more than 210,000 legal entity identifiers (LEIs) to organizations from more than 184 jurisdictions since its launch in August 2012. The number of LEIs is up 20% year-over-year, giving the GMEI utility about a 50% share of the total LEIs issued worldwide – more than three times the next largest Local Operating Unit (LOU).
An LEI is a unique code associated with a single legal entity in accordance with the ISO 17442 standard. The LEI is a reference data tool to standardize how each party in a transaction is identified. The idea behind LEIs is to help improve the measuring and monitoring of systemic risk and support more cost-effective compliance with regulatory reporting requirements.
The GMEI Utility is expected to continue to grow as global regulators increasingly mandate the use of LEIs. For example, EU regulations, such as Markets in Financial Instruments Regulation (MiFIR), mandate trade repositories reject trade submissions made with non LEIs.
Greater demand for LEIs is also expected to come from forthcoming rule changes in the U.S. e.g. the Securities and Exchange Commission’s (SEC) proposed rules to modernize reporting for registered investment companies.
Ron Jordan, Managing Director of DTCC Data Services, and Mark Steadman, Executive Director, European Head of Product for DTCC Deriv/SERV LLC, spoke with DTCC Connection about the impact regulations will have on LEI and how those challenges can be addressed and managed.
DTCC Connection: What challenges lie ahead for LEIs related to the upcoming regulations regarding derivatives trades?
Steadman: There are a number of regulations coming on line and all of them have specific requirements for the use of LEIs in derivatives trade reporting. For example, under the Markets in Financial Instruments Regulation (MiFIR), starting January 3, 2018, firms will be required to report trades and identify counterparties with an LEI. If the counterparty does not have an LEI, then a firm cannot report the trade and it is out of compliance.
The “no LEI, no trade” rule will be felt globally if a European financial institution is involved. MiFIR is a European regulation, but by imposing this rule, the regulators are extending out beyond their jurisdiction. So if your counterparty operates in a different jurisdiction, it will still need an LEI. It will be interesting to see how other regions address this, but the fact is we operate in a global economy, and if firms want to remain competitive, they’ll have to get an LEI.
Connection: What impact will MiFIR have on the growth of LEIs?
Ron Jordan, Managing Director of DTCC Data Services
Jordan: MiFIR will have a substantial impact on the growth of LEIs in that it requires reporting using LEIs in asset classes other than derivatives. For the first time, trade reporting in equities and fixed income products will require LEIs to identify parties and counter parties of trades, which should substantially increase the number of LEIs in the system. While it is difficult to determine how many new LEIs will be needed, we believe the number could be an additional 400,000 to 500,000, essentially doubling today’s numbers.
Connection: That’s a huge increase. What other challenges do you see ahead?
Steadman: Despite the fact that the LEI requirements are well known, I still anticipate that some firms are going to wait until the last minute to obtain an LEI and wait until just before the regulations take effect. LEIs have to be renewed annually, so the earlier you obtain one, the earlier you have to renew it. The challenge for the Local Operating Units will be fulfilling the influx of requests days before the rules take effect.
Connection: What is the GMEI utility doing in preparation for this potential influx of LEI requests?
Jordan: The GMEI utility is well-positioned to handle volume spikes, just as it did in the run up to CFTC and ESMA derivatives rules being implemented. Before those rules went into effect, the GMEI utility seamlessly handled volume spikes exceeding 20 times normal daily volumes. It also maintained its turnaround time of 24-48 hours, which we believe is the fastest turnaround time of any LOU. This was accomplished through a combination of web-based registration software and our ability to access additional Wrexham-based validation team members overnight when volumes increase. We will leverage these capabilities going forward and have further enhanced our registration software to make it quicker and easier to obtain an LEI.
Connection: Other forms of entity and security identifiers exist – for example, the Market Identifier Code (MIC) and the SWIFT Business Identifier Code (BIC). What remains to be done to ensure the LEI becomes the de facto identification schema for entity data globally?
Steadman: Industry and regulator support is behind the LEI. New regulations specifically require the use of LEIs for compliance. Certainly, if there is one thing that will drive adoption, it’s regulation. One standard is easier to operate and control, and adopting an industry identification standard is a pre-requisite to be able to effectively aggregate data – a necessity to monitor systemic risk. I don’t know where the other identifiers will fall in the mix but I suspect over time their use will dwindle down to the point of zero, as the LEI is enhanced to address any current gaps, such as branch identification.
Connection: What role will the GMEI play in advancing the LEI as the de facto identification system for entity data globally?
Jordan: While regulation is certainly a key driver of LEI adoption, consolidating around the LEI as the standard for which entities are identified across asset classes and jurisdictions will make it possible for banks, broker-dealers and other financial services firms to embed the LEI into their internal systems, thus helping firms reduce risks and costs associated with their own operations. The GMEI utility’s role is two fold. First, as the leading creator of LEIs in the global system, we will ensure that LEI demand is met and that the reference data associated with the LEI is of highest quality and can be trusted. Second, the GMEI utility currently has over 65,000 customers who have received at least one LEI. By ensuring our understanding of the clients uses and needs for the LEI, we can serve as their mouthpiece into the global LEI system to ensure that changes are made in a manner that benefits the financial firms without placing unnecessary cost or burdens on them. While most other identifiers are subject to the commercial interests of their owner, the LEI is truly a public good and the GMEI utility can help ensure that the benefits of the LEI outweigh the costs as the system expands.