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DMS Review: LEIs and the Focus on Entity Data

The emerging global legal entity identifier (LEI) remains far from the tipping point of acceptance across global capital markets and for some it appears as a precursor to a vast mapping exercise. But the standard is gaining ground and will form an integral element of the entity data that’s increasingly needed by companies and required by regulators, delegates heard from a panel of experts discussing at last week’s A-Team Data Management Summit (DMS) in London.

Neville Homer, legal entity reference data manager, global financial systems, at Royal Bank of Scotland, set the scene for the discussion with a description of the evolution of the LEI, mentioning the ISO 17442 standard 20-character code at the heart of the identifier, the decision to use a federated model for the global system, the emergence of pre-Local Operating Units (pre-LOUs) that will issue LEIs and the forthcoming establishment of the Central Operating Unit.

He said: “The LEI system provides one identifier for one entity, a scheme that hasn’t existed before. The 2008 crisis made it clear that regulators couldn’t monitor and manage systemic risk, so regulation is the driver of single identifiers and they should be very useful.” Homer noted the use of pre-LEIs – in this case CFTC Interim Compliance Identifiers, or CICIs – in US derivatives trade reporting as required by Dodd-Frank. The next regulations to require use of the LEI are European Markets Infrastructure Regulation reporting in February 2014, Finrep in the first quarter of 2014, Hong Kong Monetary Authority reporting in the fourth quarter of 2014, and MiFID II in 2015.

DTCC was the first organisation to act as a pre-LOU and runs the CICI utility on behalf of the CFTC. It has since been followed by additional pre-LOUs issuing pre-LEIs, including WM Datenservice in Germany, the London Stock Exchange and the National Institute of Statistics and Economic Studies in France. More pre-LOUs are emerging and will soon issue pre-LEIs, adding to the global feel of the system.

Noting the usefulness of a single identifier, Homer commented that its value is in how it is used. A question from the audience asked if the LEI would lead only to a very big mapping table, while Delaney questioned what it would do for market participants.

Marty Williams, vice president of reference data product development at Interactive Data, said: “There is nothing like a global systemic risk crisis to focus people. The LEI and its hierarchical data are a positive way to provide more information on an entity an investment manager is investing in.”

Renato Lima, who is responsible for European enterprise content and delivery at Bloomberg, added: “Regulation is bringing consistency to identifiers. Historically, they have been mapped to instruments, but the single identifier should support entity linking and extend knowledge of the entity.”

Reporting on the importance of LEIs, Christian Nilsson, senior business development director at S&P Capital IQ, said: “The LEI will help people look at how aware they are of the entities they are dealing with and how these entities are linked to others. A common identifier is a starting point, an entry-level view into what a company is doing, what its supply chain looks like and its exposure. It helps the understanding of counterparties and whether we should be trading with them.”

Delaney questioned the role of LEIs and entity data in know-your-customer (KYC) and client on-boarding activities. Homer responded: “Entity data is part of both of these functions. Valuations can be hooked to LEIs and the single identifier can be used for on boarding. At the moment, we use numerous identifiers, but the LEI will fill the gap and provide one identifier to define an entity.”

Beyond KYC and on-boarding, the LEI is expected to have a major impact in risk management. As Lima put it: “Is the LEI driving itself or is it being driven by risk? I suggest risk is driving the LEI and that it will provide a starting point for people to change how they look at entities and manage risk. The LEI is not just a mapping exercise, it is an ongoing risk process.”

That said, Homer pointed out, “At the moment, the LEI is a mapping exercise. Only 80,000 LEIs have been issued and my database holds over one million identifiers. The LEI can provide value in niche corporate markets, but for us it is a big mapping exercise and getting bigger.”

Nilsson suggested that if the LEI becomes more than a mapping exercise, it could have many use cases provided the market is ready to ingest it. This suggestion raised issues of data quality – touching on DTCC’s recent purge of 17,000 records from the CICI database – and the need for entities to review and update their data on an annual basis.

While issues of data quality and maintenance still hang in the air, Williams returned to the certainly of regulation, saying: “Regulatory mandates will drive development of the LEI and issues around it. In the US earlier this year, the National Association of Insurance Commissioners was mandated to use LEIs. Similarly, US derivates trading regulated by the CFTC must use LEIs. I am looking for regulators such as the SEC and Finra to mandate reporting using LEIs. If that happens, a lot of firms will have to sign up to the LEI.”

Homer agreed that regulation will cause the LEI to gather pace and suggested the tipping point of its acceptance may follow the establishment of the global system’s Central Operating Unit, the last, critical and directional element of the LEI system to put in place.

Responding to Delaney’s final question about what market participants should be doing about entity data now, Lima said: “At least put a placeholder in systems for the LEI, its is not going away.” The last word went to Homer, who concluded: “People should look ahead at forthcoming regulations, spread the word and make people aware of the LEI. They should also encourage data vendors to hold the LEI and prepare to centralise their entity data to make ready for it.”

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