Following its recent submission to the US Office of Financial Research (OFR) on the subject of legal entity identification, Swift’s Fabian Vandenreydt speaks to Reference Data Review about why he feels Europe and the US are on the same page with regards to standardisation of this space. Vandenreydt, who was recently promoted to head of Securities and Treasury Markets, is charged with leading the network operator’s reference data initiative: a key tenet of which is the development of the Bank Identifier Code (BIC) as a potential contender in the entity ID race.
Given its position as a non-profit organisation (a key requirement laid out by the OFR), Swift’s response to the OFR proposals is targeted at proving its credentials to be involved in the reference data utility underlying the new Treasury agency, alongside partner the Depository Trust and Clearing Corporation (DTCC). The two organisations have worked closely together on the corporate actions space, along with XBRL US, and their intent is to extend this partnership to the wider area of reference data standardisation.
In the sixth in our series of talking heads on the challenges surrounding entity data management in the current market, Vandenreydt explains what he expects to see this year in terms of regulatory led standardisation of the legal entity data space.
How has the regulatory attention directed at the legal entity identification challenge in the post-Lehman environment impacted financial institutions’ practices with regards to this data?
There has been a clear drive by regulators for more transparency in financial markets since the financial crisis. But the practical measures by which this transparency will be delivered are only now becoming clearer. So financial institutions will have to ensure that they are in a position to comply with the emerging regulatory data requirements, and are able to implement solutions that provide the necessary clarity and granularity around their activities. The smart use of reference data, such as entity identifiers, is crucial to this, and institutions have already been working to optimise their data usage for their own risk management purposes, whilst awaiting the greater clarity on reporting standards now beginning to emerge from regulators.
Which regulations and compliance requirements are having the biggest impact on this area?
Clearly the front running regulatory developments are those emerging from Dodd-Frank in the US. The vast Dodd-Frank legislation passed through the US law-making process in July 2010, and is now firmly in the rulemaking phase. Dodd-Frank contains a number of areas of regulatory focus where entity identification is a core component, including the greater transparency required around OTC derivatives and associated reporting to trade repositories, but also the larger systemic risk data collection activities which are at the heart of the new US OFR.
The process of fleshing out the formats and standards by which this information will be required from the industry has now begun, and this process will be pivotal for the way in which entity identification will develop in the industry. Key legislative developments in the EU, such as the European Market Infrastructure Regulation (EMIR), which has a focus on OTC derivatives safety and transparency, are also going to have a big impact, and the EU is very concerned to move forward on this legislation in a similar timeframe to the finalisation of rule development and implementation of the equivalent aspects of Dodd-Frank in the US.
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?
As previously mentioned, the legal entity identification approach eventually adopted by the US regulators in respect of the relevant areas of Dodd-Frank, will have a very significant impact on the way in which this issue is handled in the US. It is also likely to have an impact globally – as in reality a coordinated global regulatory approach to such standards would make sense for all concerned, regulators and the industry alike. It is in the interest of all parties (EU regulators, US regulators and the financial institutions) to reach a consensus on a global solution.
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 – what is your feeling for which will be selected as the most appropriate option and why?
It is important that regulators consult the industry on this issue so that whichever solution is adopted has wide support. It is to be expected that international, open standards developed for the industry in partnership with the industry mainly through key industry associations will prove to be the most appropriate solution.
How will all of this impact the vendor community?
There are threats and opportunities here for vendors. Certainly there are opportunities to help financial institutions manage the data challenge posed by the emerging new regulations, for example, to cross reference various proprietary data standards used in internal systems to whatever solution is adopted. There could be threats too, as the industry reference data utility concept becomes more of a reality for example in the shape of the US OFR. This would force data vendors to change their business model to ensure that they add value to the data held and available in any central utility.
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?
Risk management has increased in importance since the crisis, and financial institutions have invested in this function, and in the data needed to perform it for their own business purposes. Further change here is likely to be the result of the development and clarification of regulatory requirements.
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?
It is difficult to give a definitive answer on this. The trend would seem to be to gather as centralised a picture as possible, so that for larger groups the risks can be effectively aggregated. In order to do this a central pool of data is required. It is certain, however, that in many institutions silos do still exist. So this is all still evolving and will continue to do so in line with the developing regulatory structure.
Is there a degree of disparity in these practices between the buy side and the sell side? Large and small firms?
Across all firms regulatory requirements and compliance are areas to which increased resources are being directed. Firms need to be in a position to provide regulators with the information they are demanding, and also be confident that they can meet future likely reporting requirements. At the same time, for both regulatory and business reasons they need to show that they have effective risk management practices in place. So this challenge is now common across the financial industry, but is probably most acute for the largest sell side firms, given their business profiles and place in the financial system.
What trends do you expect to see over 2011 in terms of market practices in this space?
Increased engagement with the data requirements for better internal risk management, and for external reporting to regulatory bodies, will be the key trend in 2011. This will be coupled with support for greater standardisation on both the use of data and the data elements themselves in the US, EU and beyond.