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DTCC and Swift Signal CICI Portal as First Mover Advantage in Contest to Build LEI Infrastructure

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DTCC and Swift are back in play and aiming to be major providers to the global legal entity identifier (LEI) infrastructure after gaining first-mover advantage through this week’s official opening of a web portal for Commodity Futures Trading Commission (CFTC) interim compliant identifiers (CICIs).

Selecting from four potential providers, the CFTC last month designated the DTCC and Swift partnership as the provider of CICIs, which are required to meet swap data reporting regulations. It then published a final swap definition in the Federal Register on August 13, setting off a 60-day timer that will tick down to October 12, the date when the CFTC swap reporting and record keeping rule that includes CICIs will come into effect, initially covering OTC derivatives transactions in credit default swaps and interest rate swaps.

The CFTC’s decision to introduce CICIs before the Financial Stability Board (FSB) meets its March 2013 deadline to have a global LEI system running plays into the hands of LEI wannabes DTCC and Swift. Their initial hopes of providing the LEI infrastructure were previously dented when in May 2012 the FSB veered away from a centralised global registration authority for LEIs, a role Swift had set its sights on, and favoured instead a federated approach to the LEI infrastructure build that was approved by the G20 in July 2012.

The CICI website, www.ciciutility.org, is owned, managed and operated by DTCC and Swift, although they say that going forward, as a federated approach to the CICI and then the LEI is adopted, they will be assisted by the Association of National Numbering Agencies (Anna) in registering and validating entities. The website builds on test files of provisional LEIs provided by DTCC and Swift on the GFMA website in February 2012 and has been seeded with 24,000 legal entities weighted towards those involved in OTC derivatives trading from over 80 countries.

William Hodash, DTCC managing director, business development, says: “We waited to open the portal until we had been chosen by the CFTC to provide CICIs and until we knew the swap reporting and record keeping rule would become effective. We didn’t want to open with zero CICIs so we seeded the database with 24,000 legal entities and their reference data, and asked the entities to certify the data. We also allowed the steering group of the financial industry group we are working in to access the site last week.”

In line with the regulatory view that consuming CICI and ultimately LEI data should be free, organisations registering a CICI must pay a $200 registration fee for each CICI and an ongoing annual maintenance fee of $100. This will cover annual recertification of data by entities and its validation by DTCC using public information.

Organisations can self-register with the utility for a CICI or make third-party registrations to register their counterparties. Hodash explains: “If, for example, a hedge fund wants to register for a CICI it can self-register through the portal, pay the $200 registration fee and a CICI will immediately be returned by email and published in the database. Then our staff will find public information that validates the hedge fund’s information. Alternatively, if a bank or broker-dealer doing business with the hedge fund has a regulatory reporting requirement under the CFTC rule it can pay the $200 fee and make a third-party registration to get a CICI for the hedge fund. Again, our staff will use public data to validate information about the hedge fund and we will ask the hedge fund to certify that the data is correct. The industry and regulatory view is that self- registration is preferable as there will be better accuracy of reference data, but it’s not possible to wait for every firm to do this so there has to be another registration method.”

In the short term, Hodash expects firms that must use CICIs to map their own identifiers to the CICIs for regulatory reporting purposes. But as more asset classes are covered by the regulatory reporting requirements – OTC derivates beyond credit default swaps and interest rate swaps will be covered three months after the initial rule takes effect in October – and the LEI evolves, he suggests firms adopting identifiers for use in systems such as risk management and compliance will think about replacing existing identifiers with CICI or LEI identifiers based on the agreed ISO 17442 standard.

Returning to the burning issue of which organisations will build out the LEI infrastructure, Hodash declines to comment on any DTCC interest in a specific role. But he says: “The FSB and G20 have established the implementation and use of LEIs. The CICI is an early mover aligned around the same standard and we are moving in lockstep with the FSB, working with it as part of the LEI Private Sector Preparatory Group to guide development of the infrastructure.”

Paul Janssens, Swift LEI programme director, says: “Swift is pleased to have been chosen to work on this interim programme with DTCC to provide the CICI for firms subject to CFTC jurisdiction. We look forward to moving ahead with this first step to the global LEI solution. We are continuing to work with regulators and the industry globally to provide a fully formed and practical solution to solve the LEI challenge. This includes further work to evolve the solution to a federated data contribution and validation model over time.”

While other contributors to the LEI development suggest that DTCC and Swift continue to be covertly in favour of a centralised utility that they would own, manage and operate, Hodash maintains that even the first recommendation on the LEI made in July 2011 by DTCC along with Swift, the ISO and Anna would have delivered a federated model for LEIs on a global scale. The acquisition of Avox from Deutsche Boerse, he argues, has given DTCC the capability to validate reference data for legal entities using public data sources in 230 countries and DTCC could continue to do this as part of the LEI rollout.

“These are early days in the LEI development and there is little talk yet about searching for a central operating unit or local operating units. We are aligned with the regulatory and FSB vision of a federated solution, but we don’t think it can be achieved on the first day. A federated model will evolve over time,” he says.

In the announcement of the CICI portal, DTCC and Swift state: “DTCC, Swift, GFMA and others from the financial services industry will work closely with the FSB implementation group to move towards a consensus on the global LEI solution and are hopeful that the solution and expertise behind the [CICI] utility can be leveraged in the evolution of the global system.” While the CICI utility is expected to register fewer than 50,000 entities active in OTC derivatives markets, the stakes are much higher in the LEI space where as many as 1.5 million legal entities that are counterparties to transactions across all asset classes will need LEIs.

Looking forward, Hodash says: “We will continue to register entities and certify data, extend CICIs to entities trading other OTC derivatives and raise awareness of the utility in financial markets. The implementation of CICIs is a down-payment for the next steps of LEI development. In future, the next LEI topic will not be about business card reference data for regulatory purposes, but about entity hierarchies, ownership, affiliations and guarantors. Clarifying this information will be complex, but it will improve understanding of corporate hierarchies and, in turn, risk management.”

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