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The Left Hand Isn’t Talking to the Right

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This week saw the issue of legal entity identification raised within a number of forums, but the discussions during these various events seemed to indicate a degree of disparity between European and US approaches to the space. Moreover, they also highlighted a trend I noted back in December last year that the data management community’s efforts in drawing up these standards and the prevalent views (coming from the loudest voices in the debate) on the right course to proceed with regards to infrastructure may not be clear to, or reflective of, those from the operations community (let alone the rest of the industry).

Earlier this week, Omgeo’s webinar highlighted that a lack of a standardised legal entity identifier is considered to be one of the barriers ahead of the move to T+2 settlement in Europe. Great start – the problem is recognised as such. But although the developments around the US Office of Financial Research (OFR) were briefly touched on by a couple of the panellists (notably from the vendor community rather than the operations practitioners), there was a sense that these developments were rather US focused and more pressing European regulatory concerns were on the horizon in the nearer term that would take to focus away from involvement in these discussions.

There’s a general sense that Europe will go its own way that seems to be pervading conversations that are taking place outside of the data management community.

This notion was also evident during the panel discussion at the ISITC Europe meeting on Thursday. Panellists agreed that entity identification is a problem in the market, but there was some scepticism from speakers including the London Stock Exchange’s (LSE) head of post-trade services Kevin Milne and Simon Bennett, senior securities consultant at HSBC, about the introduction of a utility to provide this reference data to the market. Bennett noted the pitfalls involved in setting up “massive infrastructure” that is unable to keep pace with a fast evolving industry. “For profit usually means more agile,” added Milne (obviously, there’s a vested interest in exchanges maintaining this stance, however).

FIX Protocol’s global steering committee co-chair Jim Kaye (who also happens to be product development manager for European execution services at Bank of America Merrill Lynch) noted that entity identification already exists internally within financial institutions as a result of Know Your Customer (KYC) requirements. He suggested that regulators’ intentions and requirements are not necessarily the same as the industry’s and hence sounded a note of caution. Kaye also highlighted concentration risk and unintended consequences as other considerations that need to be taken into account before any kind of mandatory changes are made.

It’s not all negative, however, as things have progressed. At least the developments with regards to the OFR were discussed at the ISITC meeting, unlike the MiFID Forum event in December that I referenced in a previous blog, where the issue was not even mentioned in passing. Awareness of the issue is increasing, even if the industry is acting in its usual siloed manner with regards to providing input and feedback to regulators.

The conversations within the operations community therefore seem to differ from the conversations going on within the data management community. The EDM Council’s update this week indicated that “tightly coupled” activities on legal entity standardisation are going on across the globe and that Asian, European and US regulators are involved. A fact that does not seem to be clear to the ops community.

Mike Atkin, managing director of the data management industry group, noted that those involved in the OFR project are finishing off pulling together the final requirements for the legal entity ID standard (with a few notable disparities that need to be reconciled between the industry’s and regulators’ requirements). The next step is then a request for proposal and selection process for the registration authority and facilities manager for the OFR, which is to be led by the industry in the form of the coalition group formed by Sifma back in January.

To this end, the 15 association strong coalition group has appointed PriceWaterhouseCoopers to capture all of the industry’s requirements for an identifier and the group has accepted responsibility to reconcile any differences of opinion. The group will also be heavily involved in the RFP process and will likely have input into drawing up the timeline for implementation of the standard and the utility.

Atkin indicated that before it can do any of this, the group will first need to hammer out a compromise with regards to the industry’s views on: self-registration (issuers versus systemically important firms themselves taking responsibility); hierarchy information (dummy identifier plus additional regulatory reporting versus an ID that tries to do all these things); and global coordination of regulatory mandates for implementation (unlikely to ever happen).

To the latter point, the regulatory community seems to be experiencing its own issues with regards to getting on the same page. For example, the decision by the UK Financial Services Authority (FSA) to continue to focus on the BIC as a legal entity ID within transaction reporting, with nary a mention of a potential successor (be it ISO or another – check the FSA’s recent Market Watch newsletter for proof here), seems to be out of step with the theme of regulatory coordination at a global level.

This essentially reflects that when it comes to specific regulation, in this case MiFID (but it could easily be Basel III or UCITS IV or many others), the regulatory approach is as siloed in its response as the industry itself. By divorcing transaction reporting from the potential establishment of a global legal entity ID the regulatory community in Europe is further exacerbating the problem.

Getting regulators and industry participants on the same wavelength as each other needs to be a priority if those involved in these standardisation efforts are to have any chance of success. Convincing a minority that it’s the right way to proceed is not going to help when it comes to implementation reality, after all.

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