The first use of the financial supply chain’s new global coding scheme is being tested by swaps market participants in their new responsibility to report swaps transactions to trade repositories.
All would agree that while a lot of global cooperation has been achieved and progress has been made, it is not yet working. The intent is to have unique, unambiguous and universal codes embedded in all financial transactions.
With these codes data aggregation across the multiple business units of financial enterprises and across multiple financial institutions would be possible.
The objective for the deployment of this global ID regime was to observe a single firm’s enterprise risk and multiple firms’ systemic risk across the globe. The first test of its use for data aggregation is with swaps transactions in trade repositories.
Recent regulatory and industry initiatives are focusing on incrementally adjusting the coding scheme as regulators attempt to rollout the ID system across the globe.
Recently, ESMA (European Securities Market Authority) published reporting guidelines on the LEI (Legal Entity Identifier) and the UTI (Unique Transaction Identifier). EIOPA (European Insurance and Occupational Pension Authority) published reporting guidelines for the LEI. ISDA published reporting guidelines for the UTI and UPI (Unique Product Identifier).
These three recent releases are an attempt to bring clarity to the identification regime first proposed by the SEC, CFTC and Office of Financial Research (OFR) in 2010 and subsequently transferred to the Financial Stability Board (FSB) in 2011.
Since then the FSB has organized the Regulatory Oversight Committee, a group of 70 regulators from 40 countries, and the Global Legal Entity Identifier Foundation (GLEIF), whose board is made up of 16 industry practitioners and academics, to implement one part of the global identification scheme, the Global Legal Entity Identifier System (GLEIS).
Other regulators and trade associations have opined previously on the ID regime, including the Singapore Monetary Authority, FSB and the CFTC. ISDA’s and GFMA’s CEOs also chimed in recently on needed improvements. Relevant excerpts from all of these documents are included in the referenced footnotes.
The LEI is particularly important to implementing global as well as local swaps risk regimes as it is intended to uniquely describe the counterparties and reference entities in a swaps transaction. The LEI is also to be used in constructing the UTI.
While regulators are describing the GLEIS as “operational” the GLEIF is more cautious as they must design the operating components of the system and then implement it.
Right now what is operational is local issuance and maintenance of pre-LEIs by 17 LOUs (facilities operators designated as Local Operating Units that organize the local LEI registries and maintain business card data on each legal entity).
Another 13 LOUs are still in the formation stage.
Still to be decided is the mechanism for registering and maintaining organizational hierarchies and controlling entities of multiple LEIs; the mechanism to make changes to LEIs as corporate events such as mergers, spin-offs, acquisitions and bankruptcies occur; and the mechanism to federate all the disparate LEI registries into a virtual data base for a single view and access to the entire set of LEIs.
The general theme common to all the referenced regulatory ‘mandates’ is that:
- the identification system as currently implemented is not yet functioning as intended;
- that use of the pre-LEI codes as the counterparty code is to be used until an officially approved LEI system is operational;
- that no pre-LEIs are available for branches so a BIC (Swift issued Banking Industry Code) can be used;
- that no LEIs are planned to be available for individuals so an internal customer number can be used;
- to construct the UTI various construction ‘themes’ of each regulatory can be used until an official UTI is determined; and
- to provide for a UPI in data reporting use any available interim UPI taxonomy until a global one is determined.
This is not quite the nod to unique, unambiguous and universal code construction the industry and regulators asked for.
Also it is not yet useable for its intended purpose, in the immediate term – counterparty data aggregation within and across swaps trade repositories globally; and longer-term –for global risk analysis across all financial market participants and all the products traded.
We are not yet there on the short-term and a long way from the longer-term.
It would not be surprising, given the adjustments regulators and industry are already seeking to see the transition from the pre-LEI to the GLEIS require adjustments to the LEI codes themselves.
Perhaps a prefix appended to the LEI code to associate each LEI with its parent registering entity. This simple addition would accommodate data aggregation; ease global access; and permit rapid updating of corporate events, all key functions yet to be implemented.
For additional research on this topic see www.FinancialinterGroup.com
Allan D Grody is president of Financial InterGroup Holdings.