Roy Manning, Sapient Global Markets
"The LEI is a globally applicable identifier, but there is no global regulator enforcing it as a standard."
While there are multiple ways to identify entities in financial transactions, there isn't a unified global system to identify and link data that currently enables financial regulators and financial institutions to better understand the true nature of risk exposures across firms, markets and jurisdictions.
The Legal Entity Identifier (LEI) concept is simple enough: oblige entities to register for unique codes that make their identities clear when they take part in financial transactions.
Born out of the G20 commitments post-financial crisis, the LEI is intended to deliver additional transparency by identifying financial interconnectedness. When Lehman Brothers collapsed, regulators, financial services firms and private sector institutions struggled to identify the extent of their exposure to the firm, demonstrating the need for such a system.
However, the painful reality of what it takes to roll out such an identification system is becoming increasingly apparent. The LEI Regulatory Oversight Committee (ROC) states that more than 330,000 companies from 189 countries had registered for LEIs by the end of 2014.
And that registration comes at a cost for firms, $200 up front and then renew on an annual basis for $100.
The recent findings from entity data solution provider Alacra, regarding the number of lapsed LEIs, are a cause for concern but hardly surprising. The study shows that up to a fifth have failed to renew their registrations, while only 18% of the 67,000 entities deemed 'active' on financial markets have registered an LEI. There is clearly an adoption and ongoing governance issue.
As it stands, the LEI is limited because it is only mandatory for swaps market participants. It is available for some organisations that are active in over-the-counter (OTC) derivatives trading but not necessarily active in trading bonds or equities.
Challenges also remain related to issuing and tracking LEIs. Amid these hurdles, data management professionals have to cope with on-boarding and maintaining LEIs from multiple venues. Without a cross reference to alternative identifiers, firms need to manually map LEI into systems and apply corporate actions on an ongoing basis to maintain data provenance.
As regulatory mandates overlap, firms need to establish a holistic approach to data management. This should include connecting disparate counterparty, client, obligor, and issue data to the underlying issues held in order to create a shared, single view of entity data to facilitate aggregation of risk exposures.
The Global LEI Foundation (GLEIF) is operating LEI registration, and has identified data quality as an important goal. As such data quality concerns have been baked into the design of the global LEI system (GLEIS). Still, the process relies on self-registration.
Maintaining accuracy is going to become an even greater challenge. Continual scrutiny by market participants is going to be necessary to maintain accuracy and, seemingly, this scrutiny is not yet occurring. While entity data at the time of registration may be accurate, the reference data associated with many of the records will change over time.
As an identifier with a limited set of reference data, the LEI alone doesn't mean very much. Where it becomes useful is when it is packaged with the additional content the industry relies on day-to-day to support its business operations.
One of the biggest advantages is the potential for LEIs to make clear the relationship between individual entities and other corporate structures within their family. The LEI can make it possible to link securities to their immediate and ultimate parents, subsidiaries and affiliates.
That, of course, only works if every individual entity and its parent are registered and up-to-date.
The LEI's benefits will only be realised when it is packaged with additional content -- such as broader entity hierarchies and linkages to the securities master to provide transparency of organisational structure and risk exposure.
Essentially, the LEI could allow firms to uniquely identify and map business entity data to the many public, proprietary and internal identifiers utilised by the industry today.
It is that mapping and deployment across the enterprise that will yield the true benefits.
The unambiguous identification of entities and associated linkages would create tremendous efficiencies for market participants. The LEI could significantly reduce the amount of time to aggregate entity data across different systems for a view of enterprise-wide risk exposure to a single name issuer or group of issuers by virtue of the securities held in an investment portfolio or fund. We only need to look back at Lehman Brothers to understand how important this is to regulators, firms and to the market as a whole.
The biggest challenge however is not how to manage the code but something altogether more fundamental: Does the LEI still have a purpose? When first conceived, the industry needed an identification solution and in the intervening years, a number of other regulations have come in to force with identifiers that could potentially supersede the LEI.
The most credible of these is the Foreign Account Tax Compliance Act (FATCA), which requires a Global Intermediary Identification Number (GIIN) issued and assigned to each financial institution, identifying each jurisdiction, including the FI's jurisdiction of residence.
The processes for maintaining, ensuring its accuracy are already in place, alongside multiple cross-jurisdictional treaties in the form of the Intergovernmental Agreements (IGAs).
There is also the introduction of the Common Reporting Standard, agreed to by 53 countries, which requires organisations and individuals to identify themselves to the tax authorities by mandating the use of the Tax Identification Number (TIN). This gives organisations another identifier, controlled by governments, and likely to be as accurate, if not more accurate, than the LEI as a means of uniquely identifying organisations with which they do business.
The LEI is a globally applicable identifier, but there is no global regulator enforcing it as a standard. With GIINs and TINs in place, backed by tax authorities who have an interest in ensuring entities maintaining the codes, it could replace the LEI and reduce cost and complexity for firms.
The only downside is those legal entities that do not have a tax identifier - although that raises additional questions as to why an organisation does not have a TIN and whether a firm would want to trade with such an organisation. It also does not currently provide for entity linkage between parent and subsidiaries.
It would make a great deal of sense for policymakers on a global scale to create a reporting template that can be used across multiple reporting regimes with minimal differences to make it simpler to implement.
That would elevate the LEI beyond the current counterparty space to include issuers and guarantors, as well as decision-makers.
However, reaching that critical mass and gaining global consensus around the LEI from ESMA, SEC, CFTC, HKMA, ASIC and other authorities is the missing component to realising any additional business benefits.
As the number of potential use cases increases, it is safe to assume the number of institutions applying for and utilising LEIs could increase significantly. But unless the ongoing governance and applicability issues are resolved, the LEI is destined to be just another data field, when the potential is for it to be much more.