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A-Team Analysis: Can S&P Solve the Problem of Entity Identification Where the ISO Process Has Failed?

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Another month, another twist in the tail of the International Business Entity Identifier (IBEI) story. In fact, there could be two twists this month if the Swift CIVIC initiative does turn out to be on the skids.

As reported extensively in Reference Data Review last year (in the October 2007 issue among others), the ISO-led IBEI initiative has stalled, and though the plan is for the work of WG8 to be restarted, the prospects of an industry standard unique entity identification solution being available via this route any time soon are pretty remote. And this is starting to be more widely accepted.

As Bill Nichols of the Financial Information Services Division of the Securities & Information Industry Association told Reference Data Review last month: “We are seeing some of our larger players on the banking and broker/dealer side getting to the point where the pain is high enough that they want to sit down and make something happen to get the standards process rolling. There is still a belief that standardisation is necessary, but there is also a growing realisation that we can’t expect in some areas for standards to just be handed back to us on a platter.”

So despite the failure of the IBEI initiative, market participants’ requirement to uniquely identify legal entities to streamline internal processes and to facilitate external communication – such as in, for example, transaction reporting to regulators now that MiFID is in force in Europe – really isn’t going away.

But fear not, for ready to step into the breach is Standard & Poor’s, which is proposing that an industry solution could be created – perhaps in conjunction with the standards body, or perhaps not – off the back of the six character issuer identification component of Cusip instrument codes.

While S&P is not – as has been reported elsewhere – unveiling or launching a specific service at this time, it is, according to its vice president, securities classifications, Scott Preiss, looking seriously at how it can contribute its experience (which also includes its work with companies like D&B to facilitate security to entity linkages through services like CrossWalk) to meet what it reckons is a “significant customer need for unique business entity identification”.

S&P operates the Cusip Service Bureau on behalf of the American Bankers Association, and in December it will be the 40th anniversary of the CSB’s provision of unique identification for an array of financial instruments – and, importantly, Preiss says, not just the instruments. “Cusip codes also contain unique identification of issuers, which is one of the factors that distinguishes Cusips from other numbering conventions. For example, Microsoft has a six character identifier as a prefix to its local Cusip which uniquely identifies Microsoft and no other issuer,” he says.

“We think this is a good match for today’s requirement for unique legal entity identification, in the issuer space at least, and that we are well positioned to contribute to any global efforts to develop a standard.”

According to Preiss, firms are already making use of this issuer identification capability within Cusips. “During recent months, with some accelerated effort, we have tried to understand on a market level what the industry uses the issuer identification component of Cusips for today,” he says. “We have held a number of industry educational sessions in the US, and plan to take them on the road, to learn more about how financial institutions use the issuer codes. It seems a surprising number are using them as an internal entity identifier, including to support matching for internal systems, security master files and risk and compliance applications.”

Preiss also recognises, however, that “the industry’s requirement around legal entity identification go well beyond the issuer space”. “We also cover the obligor space and could address that using the same concept,” he says. “But the industry’s requirement doesn’t end there – a legal entity identifier is needed for funds, corporates, suppliers and counterparties more broadly.”

S&P’s plan to ensure coverage across the entire counterparty space is to seek “viable collaborations with appropriate partners”. Discussions are under way, he says, and S&P will be more explicit about with whom it is working “within the next two to three months”.

“I can say that we had a very lively session with the Sifma Operations Committee in the US towards the end of December, discussing the industry’s requirement for a legal entity identifier, and that group is very supportive of the direction in which we are headed,” he adds. “We are trying constantly to validate the need, and think we can make an important contribution to a market wide solution.”

While Preiss is careful to say S&P will continue to support the ISO standards efforts, it is clear that he – like other industry participants (Reference Data Review, December 2007) – is doubtful whether the ISO process can deliver what the market needs in a short enough time-frame, given the fact it recently stalled badly.

“We understand that effort will start anew and we remain supportive of the IBEI concept, but we are disappointed with that outcome, and by the same token what we hear from our customers is disappointment and frustration,” he says.

“They say they need a solution now to provide a global identification standard for legal entities and that they can’t afford to wait another two or three years for the ISO process to come to fruition. For any renewed effort to resurrect ISO WG8, at least in the issuer and obligor spaces, we have components we could contribute. However we must strike a delicate balance, weighing our support of the standards process with the real-time needs of our customer base.”

One of the key reasons for the failure of the ISO IBEI effort was the lack of a volunteer to be the Registration Authority for the standard. The industry was calling for Swift to do it, but Swift was reluctant to take on the task of managing the allocation of codes to the millions of entities that would need to be covered by a truly global solution.

Preiss accepts that “an industry solution for identification of all counterparties is clearly a daunting task”, and says this is “why we are supportive of a global industry standard approach”. However, he is confident that S&P can successfully address the task “despite the onerous nature of the undertaking”. ”Because we have proven capabilities in the issuer and obligor space, and some penetration on the counterparty side, bolstered by a small number of strategic partners, we think we could be successful at this. Working on our own solution would not preclude us from continuing to be supportive of the ISO standards process. We hope the standards process leads to meaningful results, though we have to balance that with the very loud voices of our clients calling for a solution now,” he says.

It is certainly plausible that a commercial entity like a data vendor might be more confident of more rapid success in such a mammoth task than a co-operative, such as Swift, that has to obtain committee agreement on the business case for all its undertakings. Indeed, it seems that, as reported on page 3 of this issue, Swift is struggling to build a business case even for the creation of CIVICs to which it has actually previously committed.

But is S&P the right commercial entity to do this? The idea of it contributing codes as part of a global solution in particular has potentially off-putting echoes of the Cusip/ISIN debate that has so dogged the development of ISINs into a truly global instrument identifier.

On this subject, Preiss says: ”We certainly hope that any remaining ‘confusion’ on the Cusip/ISIN issue would not enter into this independent issue, and it would not be prudent to speculate on this issue at this time.”

Market participants have already expressed concerns though that the recent proliferation of putative solutions for unique legal entity identification (BICs, CIVICs and the various solutions being offered by National Numbering Agencies, for example) would have negative implications for the cost of solving the legal entity identification problem – not just because it could create additional mapping work, but also because of the potential costs of getting the right to use numerous different codes issued by numerous different bodies.

“We are very sensitive to the perception that ours would be more of a commercial initiative than a cost recovery driven exercise, done because it is the right thing for the industry,” Preiss says. “We would prefer to be perceived as approaching this from a cost recovery angle than as a commercial venture.”

That said, if it takes a commercial entity that has spotted a genuine business opportunity to get this initiative off the ground on a truly global basis, would that be such a bad thing?

As Preiss adds: “Though we are aware of the sensitivity, we do also know that the demand for us to do something is very strong.”

There could, nonetheless, surely be a danger that by proposing yet another solution for legal entity identification, S&P will simply add to the noise and confusion. In having entity identifiers in its stable and suggesting that they could be – and indeed are being – used for internal entity identification, S&P is no different from a handful of other players (Avox, CounterpartyLink, Reuters et cetera). It is certainly true that firms are focusing on getting their own shops in order when it comes to unique entity identification (Canada’s Desjardins Group is a case in point, see story, page 1), and as long as they can achieve consistency internally, they arguably don’t need to use a truly global standard for that.

However, in positioning itself to provide that truly global standard solution for not just internal use but use in external communications between industry participants, and to facilitate the streamlining of that interaction and reduce the need for any mapping, S&P is going somewhat beyond the other players in the space to date.

Preiss argues that it is the very existence of multiple potential solutions that makes the need for one global solution of the kind S&P hopes to provide so much greater – and that this strengthens the case for S&P to get involved and make such a solution work.

“Since the failure of WG8, for better or worse we are in the situation where there are a number of different legal entity identifier solutions out there,” he says. “It is because of this preponderance of codes that there is so much disappointment with the failure of WG8. That preponderance of solutions today means firms have to struggle to cross-reference internal identifiers with a number of codes, and this highlights the need for a single solution. We have a user community that wants a single identifier.”

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