By Bill Meenaghan, global product manager for Alert, Omgeo
Support from the G20 group of finance ministers and central bank governors for a global legal entity identifier (LEI) system is a promising development and one that, we hope, will encourage momentum towards the adoption of the LEI standard. With the second phase of the ISO approval due to take place in December 2011, the G20’s affirmation of support is well timed. Perhaps most significantly, this recent development demonstrates a growing level of awareness of the importance of reference data as a tool to measure and reduce risk.
The financial crisis revealed serious weaknesses in market participants’ ability to accurately and quickly calculate and report exposures, evidenced by the very fact that, in the case of the Lehman default, many counterparties did not know which entity of Lehman Brothers they had done business with.
Today, firms are under pressure from regulators and end investors to improve transparency and tighten risk management systems. An industry-wide solution is needed, but market participants have shown that – for a number of reasons – they are not able to drive forward global implementation or development of data management solutions and standards. Similar projects have historically not achieved their objectives because of differing levels of adoption.
This is not surprising, since the coordination of a global LEI system is no mean feat. There are many layers and a great deal of complexity around the implementation of an LEI standard. The organisations responsible for driving the project must secure buy in from the Commodity Futures Trading Commission (representing the US), the European Central Bank (representing 17 countries in the Eurozone), the European Union and European Securities and Markets Authority (representing 27 countries across wider Europe), the Financial Service Agency (representing Japan), the Financial Stability Board (representing G20 governments and Bank for International Settlements) and the International Organisation of Securities Commissions (representing 100+ member firms).
A global LEI system, as advocated by the G20 group, along with a regulatory mandate for firms to implement LEI standards is the only way that universal adoption of the initiative can be achieved. Market participants will not be able to get the full benefit of LEIs – including reduced risk and increased transparency – unless there is global adoption.
It is anticipated that the LEI will be ready for use in 2012. By mid 2012, it is suggested that 28 global systemically important financial institutions (G-SIFIs) and all of their OTC derivative counterparties and clients will be using the LEI standard. In relation to some of the other initiatives currently underway in the financial markets, the LEI project, thus far, is a tangible example of industry associations, commercial firms, policymakers and regulatory bodies working together to drive forward an initiative which is intended to fundamentally impact and improve identification and transparency relating to the underlying investor entity.
There remains work to be done, but the G20 group’s backing will prove an encouraging and motivating force behind the initiative. While the LEI solution will not solve all of the issues, the outcomes such as improvements to risk systems and processes, and an increased ability to detect market abuse across jurisdictions will prove beneficial to the financial markets. These benefits, evidently, did not escape the attention of the G20 group.