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End of January Deadline for Responses to US Proposals for OFR Reporting of Counterparty IDs

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The industry has just under two months to respond to the proposals regarding how firms will report data to the Office of Financial Research, including the standards that must be used for identifying counterparties. The statement of policy was published in the Federal Register at the end of last month for public comment and firms have a deadline of 31 January by which they must submit responses, but be warned, the regulator will be making all responses public.

Given the timescale involved and the deadline, perhaps the regulatory community is hoping for as few responses as possible? Much the same as publishing requests for comment over the August period (when half the world is on holiday), asking for responses over the Christmas and winter holiday period seems to be a tactic designed to sneak regulation past the industry. Moreover, insisting that all responses will be made public may deter industry participants from sharing their concerns and suggestions with the regulator in full, if at all.

The Office of Financial Research has stated its “preference to adopt through rulemaking a universal standard for identifying parties to financial contracts that is established and implemented by private industry and other relevant stakeholders through a consensus process”. This “private industry” reference seemingly indicates that the Depository Trust & Clearing Corporation (DTCC) has received approval to act as the data utility underlying the new treasury agency, although it has not been confirmed. The reference to “relevant stakeholders” is also intriguing – does that mean Swift or perhaps some other party that has been involved in the discussions behind closed doors?

The statement directly refers to the desire for the involvement of international standards setting bodies – so that can certainly be read as ISO, given its involvement thus far.

The other main point of interest should be that the US regulatory community wants a legal entity identifier to be established by the 15 July 2011, at which point a regulation will be put in place to compel firms to use it in their reporting to the Office of Financial Research.

This means the industry has six months from the closing of the comment period in which to agree upon a standard that it will have to adopt for counterparty identification purposes. Given the trials and tribulations involved in trying to agree upon an ID thus far, those interested in getting their voices heard need to speak up now before it is too late, otherwise the regulatory community will push ahead regardless.

The agency is looking for feedback on the desired characteristics of an identifier and the institutional arrangements for issuing and maintaining these identifiers and their associated reference data. To this end, it has suggested that the identifier should be based on a standard that has been developed by an international “voluntary consensus standards body” (read ISO) and be unique for each legally distinct entity. The proposed legal entity identifier will contain four pieces of information: name; location; electronic address; and legal status.

One point of difficulty is that no reassignments will be possible for these identifiers and they will not reflect corporate actions or structural business changes and therefore will “persist over the life of an entity”. So, what happens in the case of M&A activity? Which identifier is retained if it is a straight merger, or if the firm relocates (especially if, as seems to be the case, a country code is embedded in the ID)?

The footnote indicates that the ID: “should not incorporate substantial information about the entity, such as name or principal place of business. Although such reference data may be useful, they are subject to change. Defining an identifier to include such information could threaten its persistence.” So does that mean the Swift Bank Identifier Code (BIC) is out of the running because it currently contains an embedded country code?

These identifiers will be available for all comers, “all eligible markets participants”, and will not be contractually restricted in use (unlike proprietary identification codes offered by most vendors). The statement also notes that the identifiers should: “Where possible, be compatible with existing systems, work across various platforms, and not conflict with other number or identification schemes.” Not asking for much then.

The body that operates the identification scheme should be “not for profit” and have “expertise in implementing standards for the financial sector”. That sounds distinctly like Swift or perhaps a utility spin off of the DTCC.

Costs to maintain this data (which, from the sounds of it, could be higher than the US$500 million earmarked for development of the Office of Financial Research as a whole) “may be recovered through other fees, as long as they are reasonable and they are not imposed on end users”. Banks can look forward to a whole lot of cost coming their way then.

Should you wish to respond to these proposals (and we strongly recommend that you do), firms should submit comments electronically via the Federal eRulemaking Portal here.

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