By Bill Meenaghan, Global Product Manager, Omgeo ALERT
These are interesting times for the reference data industry. Ambitions for a universal standard to quickly and easily identify the legal entities of financial institutions globally may, at one time, have been considered over-ambitious. The global coordination and project management required to establish a universal standard – the purpose of which is to improve the way risk is monitored in the financial systems – seemed at first to be overwhelming.
That said, the progress made to date has been impressive, particularly when compared with other industry projects, such as Europe’s Target-2-Securities initiative, which have moved much more slowly.
It is now just over two years since US financial regulators and the Financial Industry Regulatory Authority (FINRA) discussed the lack of a standardised way to identify parties of financial contracts. Since then, there have been a number of significant developments that have brought the legal entity identifier (LEI) initiative to its current status.
These high-level developments include the creation of a dedicated LEI working group by the International Organisation for Standardisation (ISO), the Private Sector Preparatory Group (PSPG); the publication of requirements by the Global Financial Markets Association (GFMA); the establishment by the Financial Stability Board (FSB) of an expert working group which published recommendations on how to structure the LEI system; and an endorsement of these recommendations by the G20.
It is an impressive list of achievements, made possible by the fact that market participants have largely been supportive of the LEI initiative. This support stems, in part, from the expectation that a globally accepted system of LEIs would reduce the cost of having to ‘cleanse’ reference data. But it has also been driven by the experience of investment managers, and the broader financial markets, following the collapse of Lehman Brothers, when many were confused about which legal entity of Lehman they had done business with.
Despite this progress and the support shown for the global LEI initiative, recently, the Commodity Futures Trading Commission (CFTC) announced its intention to move ahead with the interim LEI – known as the CFTC Interim Compliant Identifier (CICI). This will be implemented ahead of the global LEI standard which, from an investment manager’s perspective, could raise questions about the viability of a global LEI given that one national regulator has now, seemingly, introduced another approach separate from the global initiative.
But this is far from the case. Indeed, the global drive towards a universal LEI system is now stronger than ever and, if anything, the CICI is likely to accelerate the implementation of a global initiative because it is a working example that other regulators can learn from. It is expected that the CICIs that have already been created will be added to the global LEI utility once established.
To date, the progress made towards a universal LEI has been notable and one which – when fully achieved – will tangibly help to improve transparency and mitigate risk in the financial markets, to the benefit of market participants. Client on-boarding and trade reporting are just two areas that will potentially see significant efficiency improvements.