This week’s decision by the G20 to endorse the Financial Stability Board’s (FSB) recommendations on a global system of legal entity identifiers (LEIs) to counter systemic risk met a mixed response with potential parties to the development of the system glad of the G20’s go ahead, but still disagreeing on how the system’s infrastructure should be designed and built.
The FSB’s recommendations include local operating units as implementers of the global system and a ‘logically’ centralised database, but this was not enough to stop the president of the Securities Industry and Financial Markets Association (Sifma), Timothy Ryan, opening this week’s Sifma Tech conference in New York with another push for a centralised process to support the LEI.
Sifma Tech also hosted a demonstration of a Depository Trust & Clearing Corp. (DTCC) portal that could support allocation and registration of 20-character identification codes. This was made ahead of the Commodity Futures Trading Commission’s (CFTC) requirement to allocate and register identity codes in the swaps market later this summer. The CFTC says its forerunner to the LEI – the CFTC interim compliant identifier, or CICI – will be in line with the ISO 17442 standard for the LEI number structure endorsed by the FSB and expects to select the organisation that will allocate and register CICIs from a list of four competitive proposals in the next few weeks.
But in the same way as DTCC and Swift presupposed leading roles in a centralised LEI system and found their presupposition poorly placed when the FSB indicated it would take a federated approach to the identifier, the CFTC’s early entry into the market with CICIs is causing alarm in some parts of the market as the CFTC solution is likely to be seen as the basis for the LEI in the US and some suggest it will not scale to be part of a global federated LEI solution.
Allan Grody, president of Financial InterGroup, a financial industry development company and leader of an industry group that favours a federated approach to the LEI and has worked to develop the blueprint for such a solution, which the group has demonstrated to regulators, says: “The CFTC is the first regulator to require identifiers to conform to regulations it wrote on identifiers for swaps counterparties in the US. But it is ‘trading ahead’ of other regulators and our concern is that the CFTC solution won’t scale as part of a global solution.”
Grody is also concerned by proposals for a 20-character random alphanumeric identifier for the LEI that is endorsed by the group including Sifma, the Global Financial Markets Association, DTCC and Swift that initially promoted a centralised LEI system and seems unwilling to climb down despite the G20’s approval of the FSB’s recommendations for a federated system.
Grody explains: “I do not believe the Sifma group’s random numbers of 18 characters and two check digits can work in a federated solution. If the CFTC pre-empts the start of identifiers for swaps counterparties using these numbers, it could be just allocating another set of numbers that are nothing to do with the LEI.”
While Sifma has interpreted the ISO 17442 standard for the LEI of 18 characters and two check digits as a random number that is not intelligent, Financial InterGroup proposes what it calls a U3 LEI that is not intelligent, but is smart in terms of how it structures the code space to give local regulators control of the self-registration of entities.
To ensure the success of a global LEI structure, Grody advocates that the CFTC should hold back on identifiers until the FSB has decided on exactly how the global system will work and how the identifiers will be constructed, concluding: “We need a global LEI system begin the long journey of risk adjusting the financial industry. By being presumptive and pushing a system out in the face of G20 approval of the FSB’s recommendations, the CFTC will embarrass President Obama, a member of the G20 that approved the FSB recommendations, if the US system doesn’t work as part of the global system and the US financial industry will feel put upon when it has to start over again and get another set of numbers.”
While four organisations keen to meet the CFTC’s requirements for identifiers wait anxiously for the result of its decision on who will fill the brief, the FSB will soon set its own procurement process in motion having won approval for its plans from the G20. Time will be tight however, as noted in the G20 statement of approval: “We endorse the FSB recommendations regarding the framework for development of a global LEI system for parties to financial transactions, with a global governance framework representing the public interest. The LEI system will be launched by March 2013 and we ask the FSB to report on implementation progress by the November 2012 Finance Ministers and Central Bank Governors’ meeting. We encourage global adoption of the LEI to support authorities and market participants in identifying and managing financial risks.”