The Legal Entity Identifier (affectionately abbreviated to LEI) initiative appeared to be going down two tracks at SIFMA Tech 2012 Leaders Forum last week. When it comes to standards, one is better than two, but LEI could be going to two or more.
The Commodity Futures Trading Commission (CFTC) will require counterparties to register their LEIs for swaps reporting by September, said Commissioner Scott O’Melia.
“LEIs let the CFTC understand the relationships and monitor trading across markets and identify systemic risk,” he said. “It is clear that an LEI is feasible and the sooner we implement it the better. The Commission is moving forward and we hope to have the LEI in place by September.”
This doesn’t sound much different from SIFMA last year when the U.S. was actively pushing a centrally controlled LEI, eventually with ISO, SWIFT and the DTCC to run the operations. Europeans, and perhaps the rest of the world, turned out to be less enthusiastic about stashing all their financial institutional identify information with a U.S. utility. Perhaps they remembered how the U.S. forced SWIFT to open up its previously confidential payment information to American investigators trying to track down terrorist funding.
The G20 asked the Financial Stability Board (FSB) to study LEIs and make a recommendations, which it did on 8 June 2012. Contrary to the highly centralized plan proposed around the DTCC and SWIFT, the FSB called for a federated implementation.
“Since the LEI system is by nature a public good, there is a need to make sure that the gains for the broader public are captured and that provision of the LEI is not exploited in ways that do not benefit the public.” It called for flexible identifiers that take into account “jurisdictions with different regulatory, legal systems and local language character sets.”
At the SIFMA panel on LEIs, Robin Doyle, JP Morgan Chase SVP and CFO for corporate risk, gave a somewhat guarded endorsement of the FSB recommendation. Her concerns centered around the quality of the data that local operating units in countries would provide, and maintain.
“It is critically important that they adhere to strong global standards and some centralization remains to ensure the overall quality is maintained.” Federation raises concerns and needs to be watched closely, she added.
Allan Grody, whose Financial Intergroup Holdings Ltd, has put together a competing proposal for LEIs, said American firms have been ahead of the rest of the world in developing an LEI concept, and they naturally gravitated to providers they already knew well, such as DTCC and SWIFT.
“This was driven by a U.S.-centric view of what the global markets needed.” American regulators were first to push for an LEI, partly because the collapse of Lehman showed how important it is to understand the identities of parent companies and their subsidiaries. When the issue came to SIFMA it took a New York view, Grody explained, and concluded that the big warehouse utility down the block, the DTCC, was the answer. Then they added SWIFT to make it look global.
The FSB looked into the issue and decided a federated logical database where each sovereign country which wants to maintain a registry can oversee the rules without having one government owning the process. The process for registering an LEI isn’t much different from getting a domain name on the Web, and that works internationally, he added.
“The DTCC-SWIFT structure is holding onto what we believe, and the FSB believes, is yesterday’s model. Financial services is different, but it doesn’t defy gravity, it is just different.”
PJ Di Giammarino, CEO of the independent financial regulatory think-tank JWG in London, said that LEI is something of an orphan -- it doesn’t fall within job descriptions, and capital markets people have no remit to reach out to the banking industry to see how it fits their business.
“There’s been a serious absence of discussion at the appropriate levels in Europe. They are obviously distracted.” Greece, perhaps.
His firm’s report, “Dirty windows: regulating a clearer view,” notes that: “Adoption of common identifiers, such as the LEI, needs to be explicitly mandated and clear use cases for the information need to be defined. Without these, we run the risk that the models we rely on to govern the system will be undermined by lack of referential integrity of the data which creates the risk of Garbage In, Gospel Out (GIGO).”
Doyle, who has served as co-chair of the LEI Trade Association Group, said that she was impressed by the speed the G20 and the FSB were moving to get LEIs implemented.
“It’s pretty good in government terms.”
The DTCC, which hopes to be designated as the LEI provider by the CFTC, isn’t sitting around waiting. It already has 20,000 LEIs in its system and updates the files, which will be publicly available at no charge, daily, according to Mark Davies, vice president for business development there.
JPMC is already asking clients to register for LEIs as part of the onboarding process, added Doyle.
At a separate SIFMA panel, Lucille Mayer, a managing director at Pershing, said she wished the regulators would converge and get behind one LEI standard.
“If the regulators keep going at their own pace, I don’t know how we are going to make this work. Everyone wants their own identifers and the premise of LEI is one identifier that works across all different types of businesses.”
Daniel Maury, managing director at UBS, agreed.
“We as firms don’t want 16 LEI frameworks; we want to see one.”
Di Giammarino thinks Europe holds the key, but if no one is paying attention, or has the will to take on the issue, the U.S. acting in isolation could create the back door de facto standard that firms think they need to implement.
“But that is far different from a global standard.”
