The Financial Stability Board (FSB) has returned to the drawing board, inviting financial industry experts to provide further development details for an infrastructure that could underpin legal entity identifiers (LEIs) and support a federated model for the distribution and registration of LEI numbers rather than a central registration authority and depository.
The FSB’s request for more detail on a federated infrastructure for the LEI is understood to have been made in a letter to a small number of industry experts. It follows recommendations made by the FSB’s LEI expert and industry working groups in late April stating that a single organisation delivering LEIs as a global solution was not the right approach and that a federated approach would be more appropriate.
This was a blow to Swift and DTCC, which are part of a proposal made by the Securities Industry and Financial Markets Association (Sifma) for a centralised global registration authority and depository for LEIs.
With the Sifma proposal as good as quashed and the FSB – a body created by the G20 and mandated ‘to prepare recommendations for the appropriate LEI governance framework’ – expected to win approval to move forward with the LEI at the next G20 summit in June, the board is soliciting advice on how a federated framework for the LEI could be designed, built and run not only to satisfy the G20, but also for the benefit of regulators in different jurisdictions and global market participants.
Financial InterGroup, a financial industry development company, has supported a federated approach to the LEI for many years and while it was not a member of the FSB expert and working parties, it continued to lead an industry group promoting proposals for the identifier and its infrastructure that could now attract the attention of the board.
Financial InterGroup president Allan Grody, says: “We started to study the problem of transparency seven years ago and have continued with a small group of financial firms and technology providers to develop a solution to the problem. We have different views to those of the Sifma-led group and we have stood fast as we have a viable solution that is both practical and reasonable. Our approach has stood up in the face of the federated approach that has evolved during the FSB’s deliberations.”
Noting geopolitical issues as more difficult to tackle than technology issues in delivering a global solution for the LEI, Grody adds: “A centralised US registration authority and utility for LEIs won’t hold up as a baseline. The problem is geopolitical in that regulators around the world will not, nor should, give up their responsibilities of registering and understanding which financial market participants are active in their jurisdictions. They need to be involved, no central process would suffice for them.”
If a federated approach to the LEI is taken, the numbering system that identifies every legal entity must work on a global basis, but in a distributed fashion. Financial InterGroup has detailed a non-intelligent but smart number that points to, rather than contains, information about the entity. Contrary to the FSB’s initial proposal of a 20-character alphanumeric identifier, Financial InterGroup, working with companies including Semandex Networks, suggested an 11-character alphanumeric identifier made up of two distinct parts.
It has since reconstructed the identifier to meet part of the ISO 17442 standard that covers aspects of the LEI including the number formation. The standard requires 18 alphanumeric characters and two check characters taken from the 18. Financial InterGroup has conformed to this by changing its suggestion of one check character to two and adding seven zeros in front of its 11-character number.
The 11-character number comprises two parts. The first part contains six characters and is the Registration Identification – or RID – that is globally unique and is assigned in bulk to a local registration authority. The digits in this part of the number can be combined to allow for 729 million unique numbers. Each registration authority, be it a regional or local organisation, could be assigned a contiguous block of RID numbers at inception of the system to satisfy the need to identify the maximum number of legal entities within its jurisdiction. The initial registration and assignment of the RID would be automated and a financial market participant would request an RID through the system and, after certification, would be given one.
The second five-digit part of the number would be self-assigned by a financial market participant and allow financial institutions to create and register LEIs for legally dependent entities using these digits without having to go to the registration authority for an RID for each LEI assignment. The five-digit number could provide 24 million identifiers for self assignment for each RID.
The final two check sum digits would be calculated from the other digits and would ensure the correct use of the LEI before it is finally approved, certified and registered in the LEI registry owned by the local registration authority.
Financial InterGroup fashioned the core of the identifier as 11 numbers as this can satisfy all requirements for registration and 11 is a common number of digits used in companies’ internal identifiers. This, suggests Financial Intergroup, should ease the pain of shifting to LEI numbers over time, although all are agreed that this time will be measured in years not months.
“This is a design for today and tomorrow,” says Grody. “The infrastructure and technologies are already in place to support a federated approach to the LEI, including local registration authorities and a globally federated database of LEIs that regulators in different jurisdictions could access. Essentially, the infrastructure would be an overlay on the Internet with some secret sauce and using patents we have filed over the past years of developing our solution. It is not rocket science, we have brought the right parts together to create the solution.”
While the FSB is far from completing the picture that will provide regulators with a global view of all risk exposures, Grody is ready to respond if the board issues a formal request for proposals on the LEI.
“We are a neutral group of systems architects and technology companies. We have architected and laid out the blueprint for the LEI, and we have gathered together the global providers and companies that could build and run a distributed and federated LEI infrastructure. Now we hope the LEI approach we have proposed will be seen by the G20 as the way to go.”
The FSB’s next moves are far from predictable, but one of the forthcoming events on its calendar is a plenary meeting on May 28. This could discuss recommendations that the FSB will make to the G20 summit in Mexico on June 18 and 19. If the recommendations are agreed, the FSB’s role could alter and escalate, perhaps giving it rights to enter into contracts with vendors that will build the LEI infrastructure and allowing it to press governments to legislate on the LEI and its use as a global identifier of legal entities.