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BT’s Pickles Raises 10 Questions About the LEI Project

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Last week’s legal entity identification (LEI) focused workshops in Basel, which were organised by the Financial Stability Board (FSB), allowed a number of financial industry participants and regulators to get together and discuss their views on the creation of a global utility and a new LEI standard. However, the event also raised a number of outstanding questions from those in attendance: Chris Pickles, BT Global Banking & Financial Markets’ head of industry initiatives, was one such attendee and speaks to Reference Data Review about his top 10 questions on the LEI.

“In this case, ‘outstanding questions’ doesn’t necessarily mean very good ones – it just means questions that remain and that I still don’t have a clear picture of what the answers are,” explains Pickles. “Firstly, I very much want to make it clear that I am totally in favour of having unique identifiers for legal entities. It is vital that such standards are adopted not only by the financial services industry but, perhaps even more importantly, by regulators.”

He continues: “Secondly, I think that a lot of misunderstanding may exist about the LEI, because parties involved in the discussions are using the term ‘LEI’ to mean maybe three different things: having a an ISO standard format for an LEI; having a single industry utility that validates the entities that apply for an ISO standard LEI, that issues the LEIs, and that maintains a database of LEIs and directly related data per LEI as specified in the ISO 17442 specification; or having an industry utility that stores and maintains a cross reference set of data about each legal entity, for example, its name in different languages, other identifiers that relate to it, etc, to support financial institutions and regulators in addressing their broader compliance issues.”

This confusion about whether the LEI under discussion refers to a specific ISO standard, an industry utility focused on compliance issues or the proposed ISO 17442 utility is therefore the first issue that must be cleared up during any debate on the subject at the outset.

Pickles also notes that rather than focusing on current issues, the future must also be taken into account when developing any such standard. “Thirdly, I believe that it’s important that whatever the industry starts off building now must be forward compatible into the future. We can build a centralised system that locks out existing national registration authorities for legal entities or we can build a system that is inclusive of these national registration authorities and uses a federated approach,” he explains.

Pickles, of course, is also not alone in his queries regarding the new identification system, but hopefully the players in the LEI space will endeavour to address at least some of these in the coming months. As for his current list, he says: “I’ve tried to limit this initial approach to just 10 main questions – but each of these questions can raise more questions as well.”

And here they are:

Q1. Was the requirement from the US regulators to have a unique LEI containing no ‘intelligence’ at all?

A globally unique LEI containing no intelligence – no embedded information such as country of origin – would require a central system for the world from which all LEIs would be drawn. But the proposed rule from the Commodity Futures Trading Commission (CFTC) said that the identification system must “contain either no embedded intelligence or as little embedded intelligence as practicable” (Federal Register Vol 75 No 235 Page 76592). A globally unique LEI could be built from existing national LEIs if it was permissible for the LEI to contain some minimal relevant information, for example, country and identity of the issuer. Who has decided that the world must have a central utility for creating LEIs?

Q2. Why can’t an existing national LEI be used?

Many countries have a national organisation – often part of a government department – that is the registration authority for legal entities within that country. Using the existing national legal entity identifier issued by that department, preceded by information defining in which country the legal entity has a registered legal existence and which registration authority in that country issued the national legal entity identifier, would result in a globally unique LEI. Taking the opposite approach of having one global issuer of identifiers for all relevant legal entities in the world would create an additional and separate identifier, with duplication of effort, etc. So why are we taking that route?

Q3. Will an LEI be applicable to “all financial transactions”?

Having an LEI for use by regulators of financial markets is a limited scope of usage. But the wording used around the LEI is that it would be used for all “financial transactions”. That’s an almost limitless scope, and can include purchase orders, invoices, payments, etc. And that’s not to say that this would necessarily be a bad thing. But before a decision is taken about giving one body the privilege of being the issuer of financial identity to every legal entity in the world, it would be better if more of the relevant and impacted parties were brought to the table, for example current national registration authorities for legal entity identifiers. Those authorities don’t appear to have been included in the LEI discussion so far.

Q4. What are the roles of Swift and DTCC/Avox in the overall process?

From what has been described so far about the LEI standard and system, it looks like DTCC/Avox will do all of the work. What value add does Swift bring to the process of validating applicants for LEIs and issuing and maintaining LEIs? Why was DTCC/Avox not chosen to be the registration authority for LEIs?

Q5. Why does a national market regulator today not use the legal entity identifiers issued by the national registration authority for legal entities in the country that the regulator is responsible for?

This may be just a lack of understanding on my part about what constitutes a “legal entity”. What is the reason why national market regulators use their own identifiers for the firms that they regulate rather than using the domestic national legal entity identifiers that already exist?

Q6. Do national registration authorities for legal entities meet the requirements of their domestic financial market regulators and financial institutions?

Do national registration authorities for legal entities address all of the domestic entities that a national market regulator has to regulate? Are there issues regarding the accuracy of information held by these registration authorities and/or regarding the frequency of updating the registrations that they have on file? If these registration authorities don’t meet the regulatory need, should they be induced to do so, or should they be bypassed?

Q7. Why does the ISO 17442 record for each LEI not include a field for a registration authority?

The record for each LEI includes a field for the country in which the entity is legally incorporated. It does not include a field to indicate which registration authority in that country is responsible for the registration of that legal entity. If that information was included then national registration authorities that wished to do so might be able to play a more valuable role in the LEI process.

Q8. Does the proposed LEI standard as currently defined exclude the possibility of existing national registration authorities for legal entities becoming issuers of global standard LEIs in the future?

What opportunities, if any, does it allow for national registration authorities to participate positively, either today or in the future?

Q9. Will the governance of the LEI system/utility include non-financial institutions that will also have to have LEIs, such as issuers?

Q10. What is the role of ANNA and the national numbering agencies in the LEI process?

National numbering agencies are not generally the national registration agencies for legal entities. What is the role foreseen for them, if any, in the LEI process?

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