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The Low Down on ROC’s Rules for the Global LEI System for pre-Local Operating Units, But Gaps Remain

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Development of the global legal entity identifier system (GLEIS) took a significant step forward last weekend when the Regulatory Oversight Committee (ROC) of the system published a document specifying the principles and requirements that should be followed by pre-Local Operating Units (LOUs) wanting to take part in the interim GLEIS.

The document, initially scheduled for publication by the end of June 2013, but hampered by the size of the ROC and the need for consensus, is entitled ‘Principles to be observed by pre-LOUs that wish to integrate into the Interim Global Legal Entity Identifier System’, and was published on 27 July 2013. It notes ‘a need to establish interim principles and guidelines to facilitate coordination among existing pre-LOUs so that future integration into the overall system will be smoother and so that those pre-LOUs that have been endorsed by the ROC as adhering to these principles can issue pre-LEIs that are globally accepted for reporting purposes by ROC member authorities now, rather than waiting for Central Operating Unit (COU) operational oversight’.

The ROC acknowledges that there is still much to be done to implement an interim global LEI system and highlights outstanding issues that may need additional ROC or local direction.

The report recognises that while all 35 of the recommendations set down by the Financial Stability Board (FSB) – the forerunner of the ROC – apply to the GLEIS, six of the recommendations are particularly relevant to the interim system, namely: system flexibility, LEI reference data at system launch, LEI operational and historical data, LEI data validation, contingency arrangements and LEI intellectual property.

These recommendations are embedded in the pre-LOU principles that form the bulk of the document and must be followed by pre-LOUs when requesting ROC endorsement as globally compatible pre-LOUs able to issue globally accepted pre-LEIs.

Initial industry reaction to the document is positive, with participants welcoming the ROC’s move to further develop and add credence to the interim GLEIS system. Peter Warms, global head of identity and symbology development at Bloomberg, says: “The ROC’s publication of guiding principles for pre-LOUs participating in the interim GLEIS marks an important step towards taking the complex LEI system from conception to complete, global implementation. Defining clear rules at this interim stage will help to ensure uniformity among existing pre-LOUs operating across different markets and jurisdictions, as well as aid easy integration into the federated system once it is formally established under the oversight of the COU.”

Scott Preiss, vice president and chief operating officer at Cusip Global Services, says: “There are no surprises in the document, but it does reiterate some of the FSB’s principles for those who are participating in the system and is an opportunity to provide clarity around expectations of how pre-LOUs and later LOUs should work together.” He says the document implies that the COU will take shape in coming months and repeats views previously expressed by Cusip Global Services that the Association of National Numbering Agencies (ANNA) should have a key role in achieving a global LEI system. He notes similarities between the GLEIS and ANNA in terms of a central operating unit and federated organisations around the world working within a common infrastructure, and suggests the COU could operate a centralised data utility similar to the ANNA Service Bureau that is operated by SIX Information and Cusip Global Services, and consolidates ISIN data from National Numbering Agencies for their own and wider market use. He explains: “The COU could follow the same processes as ANNA. It needs to be formed in a way that is as neutral as possible, so that there are no concerns about where it is located provided its principles are democratic and it serves the market well.”

Neill Vanlint, managing director of EMEA and Asia at GoldenSource, adds: “The ROC seems to be going the right way. It recognises that a global LEI system can’t be imposed and instead needs global direction with local ownership and control. Its latest document eases pre-LOUs into the interim system and sets guidelines for them.” He notes that GoldenSource already has customers that would like to be LOUs and suggests demand and supply is on its way to meeting in the middle.

The details of the ROC’s principles for pre-LOUs are broken down into sections. The report touches first on compliance with the ISO 17442 standard and related FSB requirements, confirming that the minimum reference data available at the launch of the LEI should be as specified in ISO 17442. This information is: the official name of the legal entity; the address of the headquarters of the legal entity; the address of legal formation; the date of the first LEI assignment; the date of last update of the LEI; and the date of expiry, if applicable. For entities with a date of expiry, the reason for the expiry should be recorded, and if applicable, the LEI of the entity that acquired the expired entity. The official business registry where the foundation of the legal entity is mandated is also to be recorded on formation of the entity, where applicable, and the reference in the official business registry to the registered entity, where applicable.

Moving on to the requirement for self-registration of entities, the document states: “Self-registration will be a cornerstone of GLEIS data quality.” Self-registration is seen as the first measure to avoid exclusivity violations around an LEI with minimum requirements of the interim system allowing only an entity eligible to receive a pre-LEI, or its authorised representative, being able to obtain a pre-LEI code or request its transfer from one pre-LOU to another. Pre-LOUs must provide a transparent means for entities to provide or update information needed to register for a pre-LEI.

This section also considers complex entity hierarchies, an element of the GLEIS that has been raised many times by industry participants, but it provides no conclusive detail on how these should be registered, stating only: “Where possible, facilitated registration of entities in a complex hierarchy or other grouping should be enabled, although this is not a required minimum standard.”

Discussing the uniqueness and exclusivity of LEIs, the ROC document notes that to support global uniqueness, any pre-LEI code assigned will include a four-digit prefix assigned by the ROC secretariat, two reserve spaces, 12 digits specific to the registered entity and two check digits as specified in ISO 17442. It does not mention codes issued by pre-LOUs before 30 November 2012, when pre-LOUs were not endorsed and codes did not follow the exact pattern noted, but in a later section on portability states: “To enable the transfer [of maintenance of reference data for any pre-LEI] from an endorsed pre-LOU, the received pre-LOU must have been endorsed as well. This condition does not apply if the original pre-LOU is not endorsed.”

The document goes on to describe the need for a facility to challenge the accuracy of published pre-LEI data and says any exclusivity violations will follow survival rules that will be developed by the ROC. Similarly, it states: “A separate category of survival rules in relation to corporate actions will be defined by national laws and its application will require additional work.”

Turning to the all-important issue of reference data, the ROC describes, but does not detail, the use of compatible reference data. It states: “The GLEIS will operate as a global federated system. Reference data could be stored locally, but should be made available across the GLEIS by each pre-LOU to a set of common and compatible standards. Compatibility will allow the consolidation of information across multiple pre-LOUs within the interim global system. The interim GLEIS should avoid creating discontinuities that may complicate the transition to the longer-run GLEIS.”

Referring to the implications of compatible standards, it states: “Basic data models should have the same minimum attributes and these attributes should have the same essential meaning. Although those attributes may be expressed differently at different pre-LOUs, they must be capable of being mapped seamlessly to a common form. The minimum set should be the attributes of ISO 17442 . . . In addition to ISO 17442, additional compulsory reference data could be established by the ROC for the interim GLEIS at both global and local level.”

On historical data, the ROC notes: “Every pre-LOU should maintain historical data of any transaction occurring in their own system. These data should include corporate events affecting the entities such as mergers. In addition, the pre-LOU should be able to maintain an audit trail of all changes to the reference data, including technical record creation, updating and retirement.”

Pushing home the need for data quality across the GLEIS, the report states: “Authorities and financial institutions will only be able to use the GLEIS data effectively to perform risk analysis and other functions if the data are complete, consistent, near error free, credible, timely and accessible.” To assure data quality it proposes that metrics should be established and include both objective and subjective measures.

Flexibility is also a standout in the document, with this section stating: “Flexibility must be built into the interim GLEIS to provide the capability to expand, evolve and adapt to accommodate innovations in financial markets.” To meet the minimum requirements of the interim system, pre-LOUs must: recognise that there may be additional ROC standards and operating principles, which may be promulgated before the establishment of the COU; recognise that standards and operating principles may further evolve under ROC or COU direction as the global LEI infrastructure is implemented; and acknowledge that satisfying these requirements only enables acceptance as a pre-LOU and that other, possibly more stringent requirements, may apply to LOUs.

Stating that the interim GLEIS should be established in a way capable of transitioning to the long-run GLEIS, the ROC document sums up the outstanding issues, concluding: “These principles and requirements are the first step to harmonise the operation of the system. Further work is needed to define the necessary detailed standards for processes, communication protocols, data models and system functionality for the interim GLEIS.”

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