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Market Participants Focus on the Cost, Adoption and Long-Term Success of the LEI

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Issues of cost, adoption and long-term success dominated a debate on the legal entity identifier (LEI) held in London last week. The debate on ‘The Implications of Building a Global Legal Entity Identifier’ – organised by Interactive Data and Goodacre – featured speakers from DTCC, HSBC Securities, JP Morgan and Interactive Data.

Mark Davies, vice president, data business development at DTCC, kicked off with a review on progress towards the March 2013 deadline of a self-standing global LEI system and also DTCC’s role in the delivery of the Commodity Futures Trading Commission’s (CFTC) CICI identifier for the swaps market. On the latter, he said: “There are things we can understand from a pilot, such as the CFTC’s CICI system, that will help in developing the wider LEI programme.”

Describing the fees associated with the CICI – $200 to register an entity and an annual $100 to recertify the record – he acknowledged that this is different to other identifiers that do not carry similar costs for registration but do charge for access to the data in file format, and pointed out that the CICI utility run by DTCC and Swift is a not-for-profit operation.

Chris Johnson, head of product management, market data services at HSBC Securities, took issue with the cost allocation mechanism of schemes such as the CICI or LEI, although he first pointed out that the LEI does not yet exist and no final decisions have been made on what it will cost and how it will work on a global basis.

He said: “Although it is definitive that LEIs, or interim CICIs, will be mandatory for CFTC OTC derivatives reporting, any short-term extension of the LEI across other asset classes, such as equities and bonds, would draw in a very large number of buy-side entities. While the one-off costs and annual certification costs are expected to be small for each entity, the numbers can become material. For a buy-side firm managing investments for 5,000 funds, the one-off cost could be $1 million and annual recertification is estimated at $500,000. These costs should be borne by each individual entity, but there is a burden of administration to administrate such a charge. Still more, there are few entities, if any, on the buy side that are deemed systemically important, yet they will pick up a high proportion of the overall cost.”

Taking a wider view, Johnson described the potential difficulties of implementing the LEI, saying: “There is good thinking behind the LEI, but now it has to meet the real world. We really need the LEI to work; it is well designed and commercially viable, but not straightforward to implement and if it is handled badly it will not fly and the opportunity for it to provide much needed long-term efficiencies could be lost.”

Looking across recent and forthcoming regulations, Johnson said the plan to meet the 2013 deadline for the LEI was like all other plans, determine the reporting requirements and reporting deadline and start work. With so many regulations to accommodate, he lamented the lack of industry leadership across the larger problem, saying: “No institution is steering this centrally from a practitioner perspective, so I think banks will have to lead it themselves. On the buy side we have formed collaborative industry working groups to consider how to tackle new regulatory data reporting requirements, assess the crossover between them and recommend solutions.”

If commercial companies will make money out of yet another regulation and code, there is a glimmer of hope that banks will gain some benefits too. Johnson said: “The representatives of organisations such as DTCC and Swift have been heroic in getting the LEI this far. We now need to get our messages across to help ensure the LEI is rolled out successfully. If we were to implement the 20-character code across the whole investment process in a hurry the cost would be prohibitive, so cross-referencing is sensible. Once the tipping point of the LEI is reached, and that could be up to five years away, it may be possible to replace some entity codes, which could benefit the efficiency of the end-to-end investment process. My view is that the LEI will become industry standard and will enable efficiencies for the industry, but we will need to collaborate and plan ahead carefully to gain them.”

Sue Baldwin, global head of vendor management at JP Morgan, called on data vendors to talk to each other to ensure consistency of the LEI and its use, and also pointed to the need for all global regulators to be in sync. She argued that the LEI should be a mandatory requirement for banks, saying: “There has to be more than the ultimate parent of an entity. There must be drill down capability to get to the instrument level. This is key and, without it, it will not be possible to identify systemic risk.”

Baldwin noted potential practical difficulties in implementing the LEI, such as systems with no fields available to include the LEI’s 20-character code and questioned whether the LEI repository will deliver quality data that will not require revalidation by firms.

Consensus among the data panellists was that regulation will drive adoption of the LEI. Darren Marsh, European business manager of risk management and compliance services at Interactive Data, said: “Driving adoption is key and in the short-term it will be driven by regulation.”

As a data vendor, he expects Interactive Data to distribute LEIs, and added: “Data vendors will initially provide stand-alone cross-reference services around the LEI. Over time, as adoption grows, I expect the LEI will be embedded in securities-based services as standard, reducing the need for dedicated cross-referencing. Ultimately, I can foresee a time when we would provide LEIs in all downstream services for users to consume.”

As the debate closed, participants were anticipating the next milestone in the development of the LEI, a second meeting of the Financial Stability Board’s (FSB) LEI Private Sector Preparatory Group (PSPG) at FSB headquarters in Basel on October 15 and 16. Parties interested in providing local operating units that will distribute LEIs in local jurisdictions have been invited to demonstrate their systems at the meeting. Davies confirmed that DTCC will be among the presenters. Others expected to present include standards developer GS1 and a handful of software companies with point solutions for specific aspects of the LEI.

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