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Omgeo’s Bouchea Discusses Legal Entity Identification and Regulatory Impacts on Data Management

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In the second of our series of talking heads on the challenges surrounding entity data management in the current market, ahead of the end of month deadline for feedback to the Office of Financial Research on legal entity identification standards, we speak to Omgeo’s director of product management for its data related business solutions Mark Bouchea. He elaborates on how ongoing regulatory developments and industry initiatives are affecting the area, including the shortening of CSD settlement cycles.

Reference Data Review last spoke to Bouchea back in January last year about the vendor’s plans for its data management solutions, including its web-based global database for the maintenance and communication of standing settlement and account instructions (SSIs), Omgeo Alert. Here, he speaks more generally about industry trends within the reference data sector and the impact of regulations related to tracking systemic risk.

How do you think the regulatory attention directed at the legal entity identification challenge in the post-Lehman environment has impacted financial institutions’ practices with regards to this data?

We are entering into a new era of reference data dependence. No longer will financial institutions be able to get by with reference data and reference data systems that are only good enough. Financial regulations focused on counterparty risk and transparency have put reference data front and centre in the debate.

There is an increased focus on ascertaining the true legal entity of every counterparty to each transaction. Clients are investing considerable resource in operational activities that identify, source and maintain legal entity information and marry that data to underlying fund and settlement instruction information. This ensures that when parties settle they know exactly which entity they are instructing. Prior to this increased emphasis, participants depended upon their counterparties’ programme/solution identifiers. However, in some global firms there may be multiple entities under a single identifier or multiple identifiers mapping to a single entity. It is critical for a counterparty to identify the specific entity in each transaction, which is why this added investment is required. If the true legal identity of a counterparty is not known, it is impossible to have a complete picture of exposure to risk.

Which regulations and compliance requirements are having the biggest impact on this area?

Know your customer (KYC) and anti-money laundering. In our discussions with a large contingent of clients in the Americas, EMEA and APAC, clients from all segments cited the increased pressure but inconsistent practices needed to demonstrate compliance with KYC and associated audit type activities. Industry bodies are working to establish best practices and generally cite KYC requirements as the driving force in adopting standards to know your counterparty. These KYC obligations are being reinforced by new global financial regulations that require greater transparency and need a higher degree of electronic trading, processing and reporting of transactions. Legal entity identifiers must be attached to each of the electronic records. Unless this information is accurate, regulators will not be able to understand risk at both the micro level but also at the macro level.

In Europe, improvements to reference data and data management are also being driven by the potential of shortened settlement cycles. This initiative gathered momentum when last week, the European Commission issued its consultation document on central securities depositories (CSDs) where it clearly indicated that T+2 is the favoured settlement cycle. If shortened settlement times are to be achieved, operational processes will need to be re-engineered and higher levels of post trade automation will be required, data management is no exception.

Given there is currently no industry standard legal entity identifier and the US regulator is looking at mandating its introduction as part of the OFR, what impact will this likely have on the US market? And the rest of the world?

The impacts are far reaching. This new identifier will need to be created, validated, distributed, updated and imbedded in every KYC database at every firm and attached to every transaction. Many entities are responding to the OFR request for information. It is clear that adopting a global standard is an ultimate goal for global market participants but it is widely recognised as a considerable effort to get there. In the interim there will be an opportunity for leading providers to establish consistent entity naming/identification practices to facilitate the market’s adoption of leading entity solutions.

A number of options are on the table for such an identifier – Swift’s BIC, the S&P/Avox Cabre, a version of ISO’s IGI etc – what is your feeling for which will be selected as the most appropriate option and why?

It is impossible to predict how this will eventually shake out. It is clear that the OFR is interested in leveraging an existing global identifier. Perhaps one or more vendors will partner to satisfy the requirement.

How will all of this impact the vendor community?

The identifier selected will ultimately determine the level of impact but the factors will include, internal systems compatibility, availability/cost to source and maintain identifier selected, and integration of identifiers within a host of services and feeds.

How have counterparty risk management concerns impacted the underlying data management systems within systemically important financial institutions? What level of maturity is the market at with regards to the management of this data?

We are at the beginning of a new era in reference data management. The reference data itself will need to be more reliable, validated and available. Systems will need to connect the disparate data silos and make it available in real time for critical decision making.

Are firms largely opting for a centralised approach towards dealing with this data or are the vertical silos across the different parts of an institution persisting?

The new era will require a centralised approach as mentioned above. Silos represent disconnected risk that needs to be connected to the rest of the organisation.

Is there a degree of disparity in these practices between the buy side and the sell side? Large and small firms?

Of course, the problems become more complex in a large firm versus a small firm and the buy side has different requirements than the sell side. However, many principles remain constant across these entities. All firms will feel the pressure to better manage counterparty risk, increase transparency and improve operational efficiency.

What trends do you expect to see over 2011 in terms of market practices in this space?

There will be greater investment in reference data by financial firms. Vendors will innovate to meet the demands of this new era. This effort will require millions of dollars of investment and will extend over a multi-year period.

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