As the deadline for derivatives trade reporting under European Market Infrastructure Regulation (EMIR) looms, S&P Capital IQ reports that many companies are not ready to comply with the regulation and may not yet have pre-Legal Entity Identifiers (LEIs) that are mandatory for derivatives reporting.
S&P Capital IQ covers the issues of EMIR, the LEI and more in a recent report, Entity and Cross-Reference Data Management – addressing EMIR compliance. The report is authored by the company’s Hans Crockett, director, application specialist, enterprise and real-time solutions, and Jelmer Brons, product manager, entity level data. They suggest that while the need for LEIs for derivatives trading presents a number of challenges, the LEI could also provide benefits beyond regulatory compliance.
Among the challenges to EMIR compliance noted in the report are the problems faced by non-financial institutions that are unfamiliar with capital markets regulation, but will be subject to EMIR if they employ derivatives trading for risk management. Large financial institutions with internal counterparty databases must extend these to include LEIs, but as the pre-LEI system provides little information beyond a company name and the pre-LEI code, the mapping exercise can be difficult for institutions with many counterparties. Also of concern are the lack of clarity in the final version of EMIR and initial availability of pre-LEIs from numerous pre-Local Operating Units without, as yet, an official consolidated solution containing all issued LEIs.
These challenges loom large ahead of EMIR’s 12 February reporting deadline – although it seems activity will be monitored, but fines will not be issued, for three months after the deadline – but there are more to come. Mandatory requirements for derivatives trade clearing are expected to kick in during the third quarter of 2014, all these are not yet fully defined, with risk mitigation requirements expected to be introduced at the end of the year.
While EMIR will be a burden for many companies, the LEI is likely to find its way into further regulations, such as the Alternative Investment Fund Managers Directive. Despite this, Crockett and Brons argue a positive case for the LEI, saying it will provide benefits beyond its use in regulation. They note that the LEI can be used as a universal identifier across all systems and elements of a company both internally and externally. This provides a clearer picture of entities companies are dealing with and supports a better view of risk. Associating hierarchical reference data with LEIs makes it possible to develop a more detailed view of counterparty exposure.
The authors conclude: “Even though the implementation of LEIs has been imposed by regulation, there is an intrinsic benefit to be had in using them throughout organisations. Properly implemented, the LEI allows companies to sync reference data silos and accelerate Know Your Customer processes, both internally and in communication with third parties. Firms not obliged by regulators to use LEIs can benefit from choosing to do so, both for their intrinsic value and in preparation for future regulatory use of LEIs.”