By Bill Hodash and Eugene Ing, DTCC
Next year will mark a decade since the financial crisis. Since then, a wave of regulatory reforms has been implemented to increase the transparency and resiliency of the financial system, including the mandate to use legal entity identifiers (LEIs) across many jurisdictions. The goal is to ensure that global regulators, especially those charged with monitoring systemic risk, can accurately identify entities involved in financial transactions and the relationships and affiliations between them.
Next year will also mark six years since the introduction of what was formerly known as the CICI (CFTC Interim Compliant Identifier). The CICI was originally mandated by the CFTC in 2012 for regulatory reporting and record keeping prior to the availability of the global LEI. To enable the industry to comply with this requirement, the CFTC designated DTCC and SWIFT as the issuers of CICIs. The two firms jointly founded the CICI utility, the forerunner of what is known today as the Global Markets Entity Identifier Utility (GMEI utility). This was among the first of more than 30 Local Operating Units (LOUs) worldwide to have been established under the Global LEI System (GLEIS).
Legal entity identifiers
In the following years, the industry and regulatory communities have come a long way, and today, policymakers across the world acknowledge the importance of making the identification of counterparties mandatory for many global regulations beyond those related to derivatives reporting. As such, the number of LEIs issued has grown significantly to over 700,000 globally. The GMEI utility, which operates as the largest globally accredited LOU, has issued nearly 300,000 LEIs to date.
In Europe, Markets in Financial Instruments Directive II (MiFID) II, which will be implemented in January 2018, has mandated the use of the LEI as a requirement for trading and transaction reporting. For some legal entities, this will be the first time they’ve come under the purview of financial market regulations related to LEIs. In fact, the European Securities and Markets Authority (ESMA) recently issued clear guidance advising that any legal entities, regardless of where they are domiciled, must obtain an LEI if they plan to trade directly in Europe. This makes it paramount for firms to be proactive in acquiring an LEI to avoid compliance risk and to minimise the potential for delays to occur in acquiring their LEI due to any backlogs.
However, firms must remain cognisant of the quality of the reference data underpinning their new LEI. In other words, not all LEIs are created the same, and choosing expediency over quality could negatively impact the regulator’s ability to perform systemic risk analysis. Data quality is the linchpin of the system, and the LOUs that a firm chooses to work with is essential because the provider must be relied upon to validate the accuracy of the LEI reference data accompanying the LEI record at time of registration and whenever information about that legal entity changes.
It is also the responsibility of the LOU to work with market participants and the Global Legal Entity Identifier Foundation (GLEIF) to continuously optimise the quality, reliability and usability of the LEI and associated reference data in meeting the LEI’s purpose: improving systemic risk analysis. By doing so, not only will market participants’ operational costs be reduced, but also they can have peace of mind that they can comply from day one with the MiFID II requirements.
For regulators, the LEI is a key enabler to ensuring the soundness of the global financial system by allowing them to quickly and consistently identify counterparties to financial transactions and to more accurately aggregate risk exposure across asset classes, geographies and affiliates of legal entities.
As one of the original LOUs, we have been working for many years with the industry and supervisors to improve entity reference data quality. Our foremost priority has been to make the necessary investments in processes to validate the accuracy of reference data before and after it’s published. Our experience tells us that quality LEI registration and renewal takes more time than it would to just simply accept a registrant’s data and publish it out to the world. We’ve made a commitment to quality because there is too much at stake if LOUs fail to fully validate the accuracy of the data and continually invest in improving validation processes.