To kick off our coverage of Sibos 2011 this week in Toronto, SmartBrief caught up with Robin Doyle, co-chairwoman of LEI Trade Association Group and senior vice president at JPMorgan Chase. Doyle will moderate a panel discussion titled “Securities Reference Data: Is Your Strategy Up to Scratch?” Legal-entity identifiers are expected to be a large part of the discussion, so Doyle provided a primer on LEIs via this e-mail interview.
1. What are legal-entity identifiers?
Legal-entity identifiers are unique identifiers that allow for the accurate identification of legal entities engaged in financial transactions. LEIs are a form of reference data that have been used by firms for years to identify counterparties to trades, to facilitate transaction processing and for risk and position management. However, there is no universal system for identifying legal entities that participate in financial markets; a variety of identifiers are used in practice. As a result, regulators and the industry have recently joined together to work toward the creation of a single, global LEI standard that will serve as the internationally recognized data standard for all identification of legal entities.
2. How will a standardized LEI help the financial-services industry?
It is anticipated that firms within the marketplace will utilize the LEI solution to improve the quality of their reference data, thereby improving risk-management capabilities and creating operational efficiencies in the management of legal-entity data. Processes such as aggregation of counterparty data, risk modeling and hierarchy management can be improved with the use of a global, standardized entity identifier. Finally, there will be opportunities to provide customer-service improvements to the industry through improved customer on-boarding and more efficient corporate-action management, among other practices.
3. How will a standardized LEI affect firms’ risk-management strategies?
The ability to accurately identify legal entities engaged in financial transactions is a fundamental building block to risk and counterparty management. A global standardized legal-entity identifier will help enable financial-services organizations to more effectively measure and manage counterparty exposure and to perform systemic-risk management by providing a more accurate means for identifying counterparties across products and markets. It will provide the means for data aggregation that supports a “holistic” view of counterparty risk and improved risk measurement and modeling. In addition, understanding relationships between parent companies and their subsidiaries and how these change over time is critically important as trades are transacted and credit is extended. A global LEI standard will also help to facilitate this aspect of risk management.
4. The industry has taken a proactive role in recommending how the LEI system should work. Where are things with that process?
The recommendation is the culmination of several months of work by a coalition of global financial-services firms and trade associations (the “Trade Associations”) as a first step in developing a global industry consensus on the requirements and standards for a viable, uniform and global LEI solution. The recommended LEI solution providers are outlined below.
The Trade Associations are now consulting further with the international regulatory community, as well as the recommended organizations and other parties, to understand fully the requirements that could make the global implementation and adoption of the LEI solution possible. This includes, as a top priority, working cooperatively with these parties in defining and establishing the LEI governance structure.
On July 18, 2011, the FSB welcomed the progress of financial regulators and industry to establish a single global system for uniquely identifying parties to a financial transaction, and agreed to arrange a workshop in the autumn to discuss the issues that need to be addressed and how best to coordinate work to take this forward. These workshops will take place on September 28 and 29 in Basel, Switzerland.
The Trade Association’s Solution provider recommendation from July 11th, 2011 is as follows:
- Standards body — The International Organization for Standardization, i.e., ISO’s new standard, ISO 17442, is recommended for use as the new, authoritative legal entity identification standard.
- Core Issuing and Facilities Manager — The Depository Trust & Clearing Corporation (DTCC) and the Society for Worldwide Interbank Financial Telecommunications (SWIFT), along with DTCC’s wholly-owned subsidiary AVOX Limited, are recommended as key partners to operate the core LEI utility as the central point for data collection, data maintenance, LEI assignment, and quality assurance.
- Federated Registration — ANNA, through its network of local national numbering agencies (NNAs), is recommended as a key partner in the solution for registering, validating and maintaining LEIs for issuers, obligors, and other relevant parties in their home markets. The NNAs are envisioned to serve as the “face” of the LEI Utility to those markets while leveraging the functionality of the centralized LEI Utility for the assignment, further validation and global distribution of LEIs.
The coalition will continue to work with regulators, industry and market stakeholders to stand-up the LEI infrastructure.