The LEI: From interim identifiers to a global standard

Recently, the Commodities and Futures Trading Commission’s Scott O’Malia issued a blistering condemnation of the lack of data standards within regulation: “the Commission told the industry what information to report, but didn’t specify which language to use. This has become a serious problem … nobody should be under the illusion that promulgation of the reporting rules will enhance the Commission’s surveillance capabilities.”

With many jurisdictions around the world finalising or implementing rules requiring the use of the LEI or an interim identifier in regulatory reporting, the distinct lack of a common identifier for these reports is becoming more and more concerning. The 10 April deadline for Dodd-Frank’s swap reporting rules, by which time end-users are to register for the CFTC’s Interim Compliant Identifier, has passed. Meanwhile in the EU the July deadline for OTC derivatives trade reporting is rapidly approaching.

It is clear that there is urgency amongst both regulators and the financial industry to implement a global Legal Entity Identifier that provides both the required compatibility standards, as well as an identifier that makes business sense.

Thankfully, progress is being made. On 24 January the Regulatory Oversight Committee was established with 50 members and 19 observers made up of central banks and regulators across the globe, and has officially taken over responsibility for the LEI from the FSB. The Central Operating Unit is in the progress of being set up in Switzerland with a board of directors. With the groundwork accomplished, the LEI system will have the legal basis to begin work on the actual product.

The results of this work have already begun to manifest. The ROC has finally formally recognised the process for the issuance of LEI compatible interim identifiers or ‘pre-LEIs’ through pre-Local Operating Units (pre-LOUs) if they meet their requirements for uniqueness, transferability and registration. Aside from the CICI, the first pre-LEI on the scene is WM Datenservice’s German Entity Identifier (GEI). Given that the industry in Europe is screaming for an interim identifier for the implementation of trade reporting under EMIR, this is good news. With Irish, Turkish, Russian, French and Palestinian LOU’s registered, more pre-LEIs are likely to appear on the scene soon.

However, the pre-LEIs that are available, while beneficial for regulatory compliance, do not presently provide the associated information, data accuracy or user-base that will make the envisioned LEI so useful. Whilst both are compliant with the underlying ISO standard for the LEI, they are not the same identifier by any means. For example, the GEI contains additional fields for information on entities’ sector, business registry and jurisdictional court that the CICI does not. Vice versa, the CICI contains information on its expiry date absent in the GEI. Furthermore, the two identifiers will not be subject to the exact same registration or data validation standards meaning that they will differ in data quality.

Most importantly, however, neither the CICI nor GEI contain the hierarchical reference data (ultimate parent/immediate parent data fields) required to track counterparty exposure and thereby provide one of the key benefits to both microprudential and macroprudential risk analysis required by institutions and regulators. To meet these requirements, a huge number of new standards will need to be developed and agreed for the final form of the LEI. Such details include the protocols for registration, duplication management, portability, LOU interface, LEI issuance, reference data synchronisation and validation, language variation, funding, error-detection, data security, and automation rules as well as the operational reliability of LOUs. In short, the question has moved from ‘how should the LEI work?’ to ‘how can we make it work?’

The Private Sector Preparatory Group is working hard on detailing these standards. For a global solution to work in a world of differing standards, languages, laws and accounting methodologies, common ground needs to be sought to resolve the ‘devil in the detail’. Questions such as the definition of ‘ownership’ become vitally important when designing identification rules in a financial services context. For example, ownership definitions will differ depending on the jurisdiction, context and use-case. So too will risk and accounting disciplines  have differing definitions between what constitutes ‘owner’ and ‘controller’. Resolving these issues requires the PSPG to come to a consensus that makes as much sense for a LEI user in Japan as it does in Canada.

We are still little closer to understanding when a fully operational Global LEI will be available but progress is being made. Fast.