According to Richard Berner, the director of the Treasury Department’s Office of Financial Research, the financial crisis exposed critical gaps in the data, analysis and policy tools required to ensure financial stability. Berner should know, because his office was created via the Dodd-Frank Act to provide a place where varied research related to financial markets could be collected, studied and shared.
Berner took to the stage this week at the 42nd Annual SIFMA Operations Conference and Exhibition and highlighted one specific initiative he deemed “critical” to enhancing financial stability: the global adoption of legal entity identifiers.
“The global LEI is the cornerstone for financial data standards,” Berner said. “Had the LEI system been in place in 2008, the industry, regulators, and policymakers would have been better able to trace Lehman’s exposures and connections across the financial system.”
As a tool, Berner said LEIs represent a key starting point for the OFR as it works to better understand the complexities of financial markets. “The LEI gives us insight into “Who is who?” among legal entities. A second standard can help us identify “Who owns whom?” — a standard for hierarchies, or corporate structures, for easily identifying firms’ subsidiaries. … We are also working on a spectrum of other identifiers to help us answer the question, “Who owns what?”
But getting firms around the world to embrace LEIs is going to take some work. According to research released late last year by Tabb Group and Alacra, 17% of global banks have LEIs. In addition, 15% of entities with a credit rating and 14.5% of entities that are listed on global exchanges have LEIs. Berner says the benefits LEIs offer the industry should not be overlooked, adding “The LEI system also generates efficiencies for financial companies in internal reporting and in collecting, cleaning, and aggregating data.”
The potential for LEIs to eliminate redundancies in the financial markets is so great that Berner noted it is one of the rare instances of industry asking for more regulation. In fact, Berner lauded the efforts of industry groups like SIFMA to promote the global adoption of LEIs and said the OFR is doing everything it can to ease the process — including promoting collaboration with and within the industry. “We want to include work of private firms providing data identification systems so they can talk to each other – not compete.”
Berner also said the OFR is working to promote adoption by calling on regulators like the SEC and CFTC to require broader use of the LEI in regulatory reporting.
Despite the challenges that lie ahead in the push for global LEI adoption, Berner remains optimistic. “The global LEI system is up, running, and growing. Like any network, the LEI system has benefits that will grow as the system grows.”