Peter Warms, head of product development for global data and symbology at Bloomberg Data Solutions tackled issues around legal entity identifiers (LEIs) at last week’s A-Team Group Data Management Summit. He acknowledged the aim of a global LEI system to improve risk management and counterparty reporting, detailed industry challenges posed by the system and noted development areas that must be addressed to ensure an efficient and effective LEI roll out.
Warms also took part in a panel discussion at the event that considered potential benefits of the LEI and also some of the problems it presents to practitioners.
Warms kicked off his keynote with an outline of the LEI operating model as it stands today, including six pre-Local Operating Units (LOUs), 48,000 pre-LEIs and a handful of outstanding issues. These include quality issues, including LEI duplication that could be caused by a lack of communication between LOUs and between LOUs and the Central Operating Unit (COU) of the system, and unfulfilled records. Questions also remain around the maintenance of LEIs and whether this will become a regulatory requirement, and how corporate structures and relationship data will be represented.
To date, the forerunner of the LEI, the CFTC Interim Compliant Identifier, or CICI, required by the Commodity Futures Trading Commission (CFTC) has been issued by DTCC acting as a pre-LOU. About 500 duplicate CICIs and about 50 without address data have been discovered.
“These are all big conversation items and they are a concern, but they are being addressed by the Regulatory Oversight Committee of the global LEI system and its Committee on Evaluation and Standards,” said Warms. “We have focused on the beginning of the race – registration of legal entities – and now need to consider quality and maintenance.”
Looking at the use of LEIs for risk management purposes, Warms described the requirements of the task, including mapping issuers in a corporate group to all instrument in the group, distinguishing between ultimate parents and ultimate obligors, understanding the credit characteristics of securities, and aggregating data based on ultimate obligors, country of risk and industry flags.
He went on to suggest these requirements are a challenge and burden for the industry, saying: “The industry has hundreds of thousands of entity records. Mapping LEI data to internal entity databases and securities databases for risk management is an enormous burden, as is the creation of infrastructure to support the LEI.”
Addressing these problems from a data vendor’s perspective, Warms said Bloomberg holds details of 2.7 million entities and started mapping LEIs in November 2012 when it included LEIs in its credit risk file. The company’s next step is to include LEIs in its asset files.
The Data Management Summit panel discussion moderated by A-Team Group editor-in-chief Andrew Delaney and entitled Benefiting from the New Legal Entity Identifier, was introduced by Con Crowley from the Office of Financial Research at the US Department of the Treasury. Crowley was joined on the panel by Warms, Chris Johnson, head of product management, market data services at HSBC Securities Services, and Stuart Harvey, director at Datactics.
Crowley began with the post-financial crisis recognition that existing risk management systems were insufficient. He noted that while there was plenty of data, the right data was needed to enable such a situation to be corrected. This prompted development of the LEI system, which has been designed to support efficient functioning of financial markets.
Crowley ran through the schedule of setting up the global LEI system and said the operating details of the system and responsibility for LEIs are still to be defined. The Private Sector Preparatory Group (PSPG), set up by the Financial Stability Board to support development of the LEI system, is working on these issues and will make recommendations to the COU, which will set policies and coordinate LOUs once it is established.
The LEI system deadline is this month and with 48,000 pre-LEIs already registered, a further 5,000 to 10,000 are expected to be registered every month. “From get go, practitioners and users can expect to see LEIs arriving in data feeds as they are registered,” said Warms. Harvey commented: “The portal seems robust and scalable and there is a wide geographic spread of registered entities. The conversations we are having with customers suggest they are moving on from the pain and cost of implementing the LEI to considering the potential upstream value.”
The panellists agreed that firms need to take action on the LEI now and noted that there are still some concerns about data quality for some of the CICIs that were created before November 16, 2012, and that any potential for duplication must be eliminated.
Johnson said: “Firms need to build the foundations to incorporate the LEI into their end-to-end business processes for OTC derivatives and beyond, incorporating the requirements into scheduled system upgrades wherever possible to reduce cost, rather than reacting to the LEI at a later stage, which could be much more expensive.” He acknowledged that we are only at the start of a global LEI system, but suggested that from an investor’s standpoint long-term success will pivot on cast iron surety that LEIs live up to their unique selling points of accuracy and consistency.
The panel turned down industry suggestions that BIC codes should have been used as pre-LEIs rather than CICIs and agreed that lessons have been learnt from the CICI system, including the need to ensure data quality and address problems of handling entity names that are in various native languages and are sometimes longer than the 20-character LEI field. The suggestion of an LEI utility to ensure data consistency between data vendors was given a “perhaps” by Warms, but this again hangs on the issue of who will maintain LEIs when they are affected by changes such as merger and acquisition, or a change of address.
While Warms noted that development of the LEI system has so far been impressive, but is an iterative process that has a long way to go, Crowley concluded with hard facts on required use of the LEI. He noted that the European Commission has mandated the use of the LEI in derivates reporting starting later this year and that in the US the CFTC, the National Association of Insurance Commissioners and the Securities and Exchange Commission, for Form PF, have mandated use of the LEI. No doubt, other jurisdictions will be observing these early LEI users with a view to mandating the safety system in their own financial markets.