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Talking Reference Data with Andrew Delaney: How to Profit from LEI

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As predicted here, the Summer of LEI continues unabated. Returning from a couple of weeks in the Mediterranean – now on a diet – I read with interest our own Sarah Underwood’s account of the Financial Stability Board’s inaugural Legal Entity Identifier (LEI) Private Sector Preparatory Group (PSPG), and settled down to catch up on the latest supply-side missive on the topic: this time from Thomson Reuters.

You can read global head of legal entity content Tim Lind’s paper – titled Legal Entity Data: Mapping the Corporate Genome – by downloading it for free below. What struck me about the piece – aside from Tim’s usual rigorous treatment of the topic – was its perhaps-contrarian, bright outlook for those practitioners embracing the standard.

Lind’s paper is striking in the way that it places the LEI at the centre of the universe. His words: “We are entering a new phase in the evolution of financial data and a potential renaissance in the approach to risk management. Legal entity data will be the core building block of this renaissance.” Stirring stuff.

But whereas many industry commentators have focused on the ‘stick’ element of the need for a standard entity identifier – how failing to settle on an agreed approach will result in dire consequences of Lehman-like proportions – Lind’s paper takes a stab at identifying the ‘carrot’.

“It would be a mistake,” he writes, “to overlook the potential predictive value of legal entity data in terms of discovering revenue opportunity and supporting investment and trading positions.” In other words, this is not about mopping up after the act; it’s about pre-trade analysis of a sort.

Lind goes on to illustrate this potential through the analogy of the human genome. It’s one we’ve pondered in the past, especially since our old boss, Dennis Waters, decided to ditch the familiar world of financial technology (he sold us to Risk Magazine for $13 million) to embrace all things genome: take a look at www.genomeweb.com if this floats your boat.

In Lind’s view, the science of the human genome – and how relationships between component parts can help predict, say, how vulnerable an organism is to a specific disease – illustrates how important definition and documentation is to the science of prediction in financial markets: “To advance our understanding of credit and market risk, we first must map and document the core reference data of the corporate genome.”

Pre-Lehman and beyond, “Many firms struggled with how they uniquely identify an entity, its core attributes, their corporate hierarchy, and how to link entities to outstanding positions, transactions and other data used to assess counterparty and credit risk.” I think you get where he is going with this.

Lind’s paper goes on to talk about how various regulations are driving the need for something – something – to meet this need, and offers Thomson Reuters’ vision for creating an entity- rather than security-centric view of the world. He provides a useful check-list of the adjacent data sets that Thomson Reuters believes legal entities should link to: something, surely, to cut out and keep, and possibly stick to the fridge with a magnet (or maybe not).

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