LEI

The challenge of Legal Entity Identification is not new. The lack of standard identifiers coupled with the absence of a widely accepted source of legal hierarchy information has been a headache/stumbling block for the industry for many years. Risk management, compliance, pre-trade research and operations (e.g. settlement) functions have all been negatively impacted. Profitability has also suffered and yet the problems remained unresolved.

However, the global financial crisis has moved the topic center-stage. Private market participants, industry associations and government regulators have all been tackling the issue with a renewed focus.

There are many drivers behind a unique system to identify legal entities globally. Here are some of the needs commonly cited as incentives for the establishment of a unique Legal Entity Identifier (LEI):

  • Ability for regulators to detect and monitor systemic risk
  • Comprehensive exposure analysis by entities, geographies, sectors, …
  • Better understanding and mitigation of counterparty risk
  • Development of a holistic view of counterparties/clients
  • Need to cross-sell within existing business relationships
  • More accurate margin calculation
  • Reduction of trade breaks and failures
  • Improvement in payments, clearing, and settlement activities
  • Link instruments with their issuers (aka “issues to issuers linkage”)
  • Facilitate the tracking and application of corporate actions events (e.g. M&A, name changes, …)

 

See how we can help with your CICI mapping!

Map

 

Things are getting serious

In the US, the Dodd–Frank Wall Street Reform and Consumer Protection Act mandated initiatives to create standard LEIs. At the end of 2010, the Office of Financial Research (part of the US Treasury) highlighted the need for a universal system for identifying legal entities in the financial industry. Here is the link to the official statement: https://federalregister.gov/a/2010-30018

The Commodities and Futures Trade Commission (CFTC) is also involved in the development of LEI standards for derivatives (these are known as CFTC Interim Compliant Identifiers, or CICIs, and will be used until the global LEI system is fully functional).

However, the LEI is not just a US-based project. Around the globe, financial institutions, regulators, utilities and industry bodies are coming together to overcome the current fragmented system and establish common identifiers.

The importance of creating a shared system of identifiers has been recognized by the G-20 finance ministers and leaders, the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO). Progress has been rather swift considering the usual pace for these types of global initiatives that require a broad consensus to be successful.

  • ISO has created a new standard for legal entities, ISO 17442, which has been approved by the Financial Stability Board (FSB).
  • The FSB has published its position and plans and has established the LEI Implementation Group. To support the Implementation Group in its preparatory work to establish a global LEI system, the FSB asked interested parties from the private sector to join (in) the effort. Joss Technology was selected and currently participates in the FSB LEI Private Sector Preparatory Group (PSPG).
  • The G-20 has endorsed and approved the FSB standard. The deadline set for the LEI system to be fully functional is March 2013.

 

Will you be ready?

Whether you are a buy-side or a sell-side firm, whether you are a small player or a very large market participant, you will be impacted by the introduction of the LEI. Preparation for the upcoming standard will be different in every organization. The scale of the effort required will also vary significantly.

Some institutions have already laid a foundation in order to facilitate the work but, even for them, internal changes to systems and processes will be inevitable. Furthermore, the LEI will not replace internal and external identifiers that may be widely used throughout the organization today.

Here are some of the activities you will not escape to implement the LEI before it goes LIVE and even after it is used:

  • Aggregate entity data (counterparties, issuers, custodians, …) scattered across your enterprise
  • Map and align the internal information you collected
  • Identify and fix data quality issues from internal systems
  • Enrich and validate your data where appropriate using external sources
  • Cross-reference your data against the LEI
  • Accurately and comprehensively represent corporate hierarchy relationships (aka “family tree” from immediate to ultimate parent)
  • Link legal entities with securities instruments
  • Disseminate your consolidated entity data to all relevant systems (spanning the front, middle and back office systems)
  • Dynamically maintain the entity data (e.g. tracking of corporate actions events)

This is where we can help. Joss Technology specializes in providing Entity Data solutions. Helping our clients prepare for the LEI is our bread and butter so do get in touch. We have developed the right tools and processed in order to minimize the work that you need to do. For more information, please click here to download our LEI datasheet or get in touch via email or via phone.