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Experts Debate the Timeline, Benefits and Challenges of the Global LEI System

The expert panel on this week’s A-Team Hot Topics webinar on global legal entity identifier (LEI) expects the new standard to be fully operational by the end of 2013, as it builds momentum following next month’s official roll-out.

With the establishment of a Regulatory Oversight Committee (ROC) early this year, the creation of a Central Operating Unit (COU) and rules to manage level two LEI data, including entity relationship data, are key tasks that remain to be fulfilled. But there can be little doubt that both the private and public sectors are standing firm behind the LEI initiative and have identified benefits that will accrue from its ongoing development.

Andrew Delaney, editor-in-chief at A-Team Group, kicked off the well-attended webinar – titled ‘Preparing for Primetime: How to Benefit from the Global LEI’ – by outlining the current state of play and raising questions about the long-term challenges and opportunities presented by the LEI. He was joined by panellists Francis Gross, head of division, external statistics, at the European Central Bank; Steven Meizanis, product development for global data and symbology at Bloomberg Data Solutions; Mark Davies, general manager of Avox; and Tim Lind, global head of legal entity and corporate actions, enterprise content at Thomson Reuters.

Delaney set the scene by describing the establishment of the ROC as the governance framework for the LEI, the pre-LEI issue of CFTC Interim Compliant Identifiers – or CICIs – authorised by the Commodity Futures Trading Commission (CFTC) and designed to identify swap counterparties, ongoing industry consultation on LEI system development within the Private Sector Preparatory Group (PSPG), and increased industry awareness of the LEI registration process. Considering the implementation phase of the LEI, he noted internal projects underway at many financial firms, but questioned the timeline of a complete global LEI system.

Responding on this issue, Gross explained: “There will not be a COU and worldwide Local Operating Units (LOUs) in place by the end of March. The ROC is working on the Committee on Evaluation and Standards that will look at the technical and organisational aspects of an operational system. It is also analysing elements such as level two data covering entity relationships and is setting up the LEI Foundation that will operate the COU.

“The location and leadership of the COU has yet to be determined. A board of directors will be selected from the private sector, but this will be a difficult task, as it must balance issues including geographies, competence and seniority. The directors will then select a CEO to build up the COU, select a location for the COU and work on developing business plans for the LEI.”

Gross suggests the selection of board members could take a couple of months. The board will then need to be approved by the ROC before the COU starts work, perhaps late this year. In the meantime, pre-LEI systems such as the CFTC’s CICIs and similar structures being developed in Europe are expected to plug the gap.

While these pre-LEI systems have not been universally welcomed by the financial sector, with some members fearing they could derail the LEI initiative, they are viewed by most as a useful precursor to the LEI. Bloomberg’s Meizanis said: “The CICI has helped people to prepare for the LEI. Firms can look at the data and see how it works and then begin to build systems. It is rare for firms to get a preview that works and they can build around.”

Considering specific use cases of the CICI, Avox’s Davies noted reporting under the European Market Infrastructure Regulation (EMIR), which is due to start in August this year. The technical standards of EMIR make reference to the LEI as a requirement for reporting parties to transactions, but recognising that it will take time to build out a global LEI system, Davies explained: “EMIR also makes reference to intermediate identities, so I expect the CICI to be a valid interim identity for reporting.”

Turning to the potential benefits of a global LEI system, Delaney asked the panellists to share their views on who would benefit and how. All agreed that tasks such as know your customer, anti-money laundering and client onboarding would benefit from a common identifier that can remove the imprecise nature of information such as company names, but the benefits could go further.

Davies built on the common identifier theme, saying: “The LEI provides a universal language we can all understand. It will deliver many types of benefits in areas including external hand-offs of data to third parties such as data vendors, data hand-offs between firms and between firms and regulators, and the sharing of information among regulators.”

Davies acknowledged that while the LEI will deliver benefits, it will not fulfil all the entity data requirements of a firm. He highlighted the Foreign Account Tax Compliance Act (Fatca) that includes the concept of beneficial owners. These could be firms that could be registered under the LEI scheme, but also individuals who are outside the scope of the LEI. Davies said activities that are not regulated to include LEIs could still benefit from the use of the common codes in handling entity data between parties.

If these are some of the expected benefits of the global LEI system, consensus among the panellists suggested they will only reach their full potential under the pressure of regulation. Thomson Reuters’ Lind took up the argument, saying: “One principle of the development was to make the LEI useful to the private sector, but regulatory compulsion is key. Without regulatory compulsion it will be difficult to get everyone on board.” Extending the use of the LEI in the private sector beyond capital markets, Lind cited the National Association of Insurance Commissioners as an organisation that could be interested in introducing the LEI into the insurance sector.

Gross concurred with Lind, explaining: “The LEI will only be successful and survive if it is useful. It will take years of engagement and building to get to where the LEI could be, but there is no alternative.”

With the private and public sectors committed to the LEI system as a means of improving market transparency, better monitoring systemic risk and, for private firms, increasing operational benefits and reducing costs through the delivery of higher quality data and easier exchange of data, the next step is implementation.

Lind reported that many of Thomson Reuters’ clients are creating centralised groups with the tools to capture and validate data, and then deliver it to downstream applications. The central function is fairly broad and includes the mapping of LEI codes to other existing codes.

Meizanis reported similar work among Bloomberg’s clients and added: “We all need to be able to get good data from an LEI utility. This means there must be good rules around level two data. The PSPG is doing a great job and once the registering of entity data is defined we will have a long-lasting system.”

Level one – or business card – reference data attached to each legal entity will be free and available to everyone and there are unlikely to be hindrances in accessing the data. Level two hierarchy and relationship data poses more of a problem. Gross explained: “Relationship data needs a lot of work as the law on what is made available differs from country to country. The financial crisis showed we need transparency, so the lawmakers will have to choose what they will do.”

Delaney also raised the issue of keeping entity data up to date, leading Gross to comment: “The ambition is to offer data that is fit for operational purposes in very near real time. This means data will need to be validated by an LOU and certified by the entity. It also means there will need to be rules and conversations with people who cover corporate actions about how they will communicate changes to entity data. We have a plan, but no process. This is the work of the PSPG.”

Davies reflected on this issue with Avox’s experience of issuing CICIs. “We have learnt that the validation of every record is complex and challenging, and needs to be extended to every jurisdiction. A huge amount of information is needed for the validation process, but there is no greater incentive for firms to keep up to date than regulators saying they must.” Davies also described a useful ‘open challenge’ facility around the CICI that allows people to challenge CICI entity data, a feature that Gross expects to be mirrored in some way in the LEI system.

At a firm level, the panellists noted the need to map LEIs to existing internal coding systems, but suggested this was a minimum response with those mapping codes merely to meet Dodd-Frank and EMIR regulation failing to gain the benefits of an enterprise approach that could support wider management of LEI data and, perhaps, its inclusion in reference data and risk management systems.

Looking beyond immediate regulatory requirements, Lind said: “We are at the beginning of a very long journey. If the LEI can be the focal point to which information about an issuer can be added, say news or analysis, and the impact of an event on the issuer can be understood, risk management will be better and it will be possible to make better investments decisions around stock selection and asset allocation.”

Perhaps summing up the mood of the webinar and the industry understanding of the LEI systems that has grown with its development, Gross concluded: “This is not a question of more information, but how we harness the LEI.”

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