The global legal entity identifier (LEI) system mandated by the G20 in November 2011 and initiated by the Financial Stability Board (FSB) soon after has been some time in the making, but it seems to be headed in the right direction despite disagreement among market participants on some elements of the solution; a change of mind by the FSB to make the system federated rather than centralised; the early, perhaps too early, introduction of CFTC Interim Compliant Identifiers (CICIs) allocated and managed by DTCC and Swift; and unabashed commercial pressure by those with vested interests as the development programme got underway.
With only two weeks to go until the Regulatory Oversight Committee (ROC), the permanent governance body of the global LEI system, takes over responsibility for the leadership of the system from the FSB, development is looking pretty good. None of the problems perceived along the way have pushed the programme off course –some have even served to add useful content for consideration – the FSB has held its ground in providing an open forum for the development of an industry-led system for the public good, and the first pieces of the system are in place. When the FSB retires and the ROC meets in Toronto later this month, the LEI system will have a governance body and a framework for operation. This will be followed by the global LEI Foundation that will operate the Central Operating Unit (COU) and there is every chance that the genesis of a global system of entity identifiers will be in place by the March 2013 deadline imposed by the FSB.
Like any complex development, the LEI programme has and will continue to court controversy. It will also generate unintended consequences, although these will not necessarily be to the detriment of the industry. The first major controversy was the FSB’s decision to move from an initial plan for a centralised system – much favoured by the likes of DTCC and Swift who perceived themselves as strong candidates to operate a central utility and allocate LEIs – to a federated system that instead includes local operating units (LOUs) that will allocate and manage LEIs. While the shock of the turnaround has long since subsided, many issues remain outstanding, such as the selection of LOUs in different jurisdictions, the integration into the global system of pre-LEI identifiers issued by pre-LEI LOUs – such as those sponsored by the Commodity Futures Trading Commission, Bundesanstalt f?r Finanzdienstleistungsaufsicht, Irish Stock Exchange and Palestine Stock Exchange – and the successful operation of the 20-character alphanumeric LEI code based on ISO 17442 and endorsed by the FSB.
We are confident these issues will be resolved by the ROC, if not to the satisfaction of all parties, at least to the point where they will support the creation of a working LEI solution. The LEI Private Sector Preparatory Group (PSPG) and its many work streams that have contributed significantly to the development of the LEI system should not be overlooked here. Like the LEI Implementation Group it was due to be disbanded on handover from the FSB to the ROC, but it may be reprieved with an ROC decision due at the Toronto meeting. For the record, our vote is on sustaining the PSPG to ensure continuity of interest around essential elements of the LEI such as successful operation of the number allocation scheme and the critical development of reference and hierarchy data that is an absolute requirement for the system to meet its stated aim of stemming systemic risk.
In terms of unintended consequences, the LEI system offers huge potential opportunities and will, no doubt, hit some problems. The importance of the scheme to the financial services industry and global economy at large should wrap up the latter with haste, but the opportunities will endure.
The situation may not look quite so optimistic to financial organisations struggling to get a good understanding of, and budget for, an unfinished system, but the outlook is bright. Remember the failure of previous efforts to create global identification schemes? Sure you do, but this one is different. It was conceived out of necessity, will become a regulatory imperative and, most importantly and unusually, has been made by the industry for the industry.
At an industry level, the LEI is expected to feature further afield than in the risk infrastructure intended to avoid another disaster on the scale of the 2008 Lehman collapse. Among market participants it could open doors to new streams of revenue based on clean and clear entity data accompanied by accurate reference and hierarchy data.
No-one ever said integrating the LEI into existing systems, mapping it to other codes and working with data feeds including LEIs from data vendors would be easy, but the outcome of standardised and well governed entity data could be outstanding performance and a platform for growth. Providing the ROC makes the right decisions, the LEI presents opportunities not to be missed.