The Legal Entity Identifier (LEI) has come a long way since it was introduced to financial markets by the Financial Stability Board back in June 2012, but it is far from becoming a primary entity identifier and needs further development to fulfill its initial purpose of providing a means to monitor systemic risk.
The extent to which the LEI is used, issues around its implementation and its potential benefits were discussed during a recent A-Team Group webinar entitled Practicalities of Working with the Global LEI. The webinar included experts James Redfern, managing director of CounterpartyLink, and Stephen Engdahl, senior vice president of product strategy at GoldenSource, and moderator Sarah Underwood, an A-Team editor.
Taking a look at the big picture of entity data management, Redfern and Engdahl agreed that many firms are moving their focus from security to entity centric data management with a view to improving their understanding of risk exposure and incorporating the LEI for regulatory reporting. They also agreed that while progress is being made in entity data management, legacy systems, as well as data coverage and quality, can be a problem in practical implementation.
Redfern explained: “The data management issues around entity data include managing data from many different sources, ensuring data quality, which can be difficult when the data comes from a variety of sources, and standardising data definitions. The ultimate challenge is to improve data quality and consistency across internal platforms as this can help firms meet regulatory requirements and improve business practices.”
Engdahl added: “Silos of information about entities can compound the data management problem as information about issuers, customers and counterparties comes from different places, is owned by different people and is used and stored by different departments in different ways. There are also different levels of granularity in entity data depending on how it is used and stored, making it difficult to map across departments.”
Turning more specifically to the LEI and the extent to which it is being used, Engdahl said: “The LEI first emerged in derivatives trading as it is required for regulatory reporting. Some firms are taking a tactical approach to its implementation, perhaps just adding it to the trading desk, and others are taking a strategic approach, pulling together all the relevant data and pushing the LEI out beyond trading and into business processes such as counterparty onboarding.”
While LEIs can be sourced from public websites, including those of Local Operating Units within the Global LEI System, the vast majority of firms are using data feeds from vendors with which they already have relationships. If this is a relatively straightforward process, identifying LEI data hierarchies is more difficult as they have not yet been defined for regulatory purposes by the Regulatory Oversight Committee of the LEI and are being developed by firms and data vendors.
Redfern explained: “Hierarchy data is hugely important in terms of aggregating data and linking entities to build out company structures. The task of developing hierarchy data is complex, but the data is key to a basic understanding of customers and their ultimate beneficial owners. As there is not yet a mandate requiring deep ownership data around LEIs, it is incumbent on practitioners and vendors like CounterpartyLink to create and maintain the required information.”
Noting that the LEI has yet to fulfil its role in helping supervisors to understand systemic risk because of its lack of hierarchy data, Engdahl said firms are gathering some hierarchy data and vendors are supplying the rest, with firms then applying in-house overrides to use the hierarchy data for different purposes such as rolling up risk exposure to countries or particular business functions.
While regulatory mandates are the main driver behind the LEI, over 310,000 LEIs have been issued to date, and the identifier is likely to be improved as it becomes commonplace in the industry, Redfern and Engdahl agreed that the established use of proprietary entity identifiers mean the LEI is far from becoming a primary identifier. Engdahl said: “Extensive structures of firms’ own identifiers and systems with embedded logic that use these identifiers make the business case for the LEI difficult. Long term, we expect the LEI to exist alongside other identifier schemes.”
This approach may mainline at most firms for the foreseeable future, but the near-term requirement to use the LEI in regulatory reporting under EMIR and Dodd-Frank remains very real. Engdahl said this is best achieved by defining each entity, agreeing its attributes, standardising terms and centralising maintenance of the data. Considering best practices for wider entity data management, he added: “The need is to take external information, manage it and deliver it to various areas of a business, ensuring that data enriched in one area reaches other areas. When data is removed from silos and a master data management approach is taken, it is possible to see real benefits. Enriched data can be made available to the risk practice, account management can link data about issuers, customers and counterparties to see how firms are related and build deep relationships, and trading can better understand risk exposure and improve reporting. Entity data management is not just about regulation, it is about improved and profitable business outcomes.”