UPDATED: A-Team’s Comprehensive Guide to the Legal Entity ID Feedback to the OFR

The start of this week saw the passing of deadline for feedback to the Office of Financial Research on the subject of legal entity identification and it appears that a number of recurring themes crop up in the 30 different responses (updated entries included) submitted by various industry associations, including concerns about the tight timelines impacting the right choices being made and the need for global coordination. Following the publication of the proposals in the Federal Register at the end of November, the industry had just under two months to respond to the suggestions regarding how firms will report data to the Office of Financial Research, including the standards that must be used for identifying counterparties.

The US Treasury has received a total of 30 responses (omitting duplicate responses submitted by individual organisations who have contributed to a group response – EDM Council and Financial Services Roundtable) from:

• the American Benefits Council;
• a combined response by the Clearing House Association, EDM Council, the Financial Services Roundtable, the Futures Industry Association (FIA), International Swaps and Derivatives Association (ISDA), the Investment Company Institute, the Managed Funds Association (MFA) and the Securities Industry and Financial Markets Association (Sifma);
• the Depository Trust and Clearing Corporation (DTCC), which is tipped to run the utility;
• the British Bankers’ Association (BBA), think tank JWG and the Systemic Risk Working Group of University College London (UCL);
• German buy side association, Bundesverband Investment und Asset Management (BVI)
• barcode identification standards group GS1 and consultant Financial InterGroup;
• legal firm Schwartz & Ballen (on behalf of a number of unidentified financial institutions);
• D&B, the US operating subsidiary of the Dun & Bradstreet Corporation;
• the Independent Community Bankers of America (ICBA);
• Allan Mendelowitz, on behalf of the Committee to Establish the National Institute of Finance (the precursor to the OFR);
• the American Bankers Association (ABA);
• risk management solution vendor SAS;
• the US Mortgage Bankers Association (MBA);
• the Conference of State Bank Supervisors (CSBS);
• individual Joyce Dillard (referring to particular problems related to public private partnerships in the US);
• the Association of National Numbering Agencies (ANNA);
• the American Council of Life Insurers (ACLI);
• the International Organisation for Standardisation Technical Committee for financial services (ISO TC 68);
• US standards committee ASC X9;
• the Bank of England;
• the European Central Bank (ECB);
• data vendor Interactive Data;
• international central securities depository (CSD) Euroclear;
• Cusip Global Services (CGS);
• data vendor Bloomberg;
• Swift;
• Arkansas-based retail bank Arvest Bank;
• Mahesh Bansal from Indian-based IT services business Wipro;
• academic at MIT’s Sloan School of Management Jian Helen Yang; and
• Rupesh Muttyal, also from Wipro.

As you can see from the list, the number of international or non-US based associations providing feedback to the proposals is relatively low, representing just seven out of the 30 responses, as could be expected (although a total of 12 international associations have contributed to various responses). However, all of these international respondents (and some of the US-based respondents) make a point of stressing the need for the US Treasury Department to coordinate with regulators across the globe in this endeavour.

For example, the combined response by the group of associations including Sifma and ISDA states that coordination is important between “all the major domestic and global financial services regulators” in order to ensure that there is only one legal entity identification standard mandated for the global markets. From across the pond, the combined response of the BBA, JWG and UCL also highlights the need for a standard that is “globally applicable, relevant and implementable”, rather than one that focuses on the US market’s requirements. Much like Sifma’s earlier feedback to regulators at large about abstract deadlines, the combined Sifma response also urges the Office of Financial Research to bear in mind that pre-existing deadlines should not be prioritised over taking the time to make the right choice for the financial markets.

The BBA response also stresses the need for “realistic goals, timelines and expectations” for the standard and suggests therefore that it initially focuses solely on the wholesale business to begin with, and then gradually increases the scope. In general, most respondents seem keen for a phased approach of some sort, even if the specific phases that should be adopted are not articulated upon.

Other recurring themes include the need for the data utility to be operated on a not for profit, cost recovery basis, in order to ensure the industry is not burdened with high costs. Many also suggest the identifier should be lightweight or thin and contain only basic reference data items such as name and address data, but little in the way of hierarchical or relational data. This is to ensure that the new Treasury agency is not overwhelmed at the start of the initiative and that the identifiers can be used for multiple purposes.

However, there are a number of very distinct differences between many of the responses, which is perhaps reflective of the challenge that the Office of Financial Research faces in seeking to establish an identification system for all legal entities in the financial markets. Many of the US centric suggestions will likely prove unpopular across the pond and the benefits of a federated versus a centralised approach to the maintenance of this data is bound to cause debate for some time to come.

In terms of participants and contributors, the breakdown is as follows: 10 US focused associations; 12 internationally focused associations; nine vendors; two academics; and six that can be classed as ‘other’.

Here is a breakdown of the main points and themes in each response: Clearing House Association, EDM Council, Financial Services Roundtable, FIA, ISDA, Investment Company Institute, MFA and Sifma Response This response is supportive of the proposals as a whole and indicates that the eight associations have committed to establish a project team to work further on identifying the particular characteristics and details of a legal entity identifier.

• Agreement that a legal entity identifier is a desirable goal and reference is made to the systemic risk monitoring benefits of such a move.
• An identification standard should take into account global coverage.
• The associations contend that the entity responsible for the legal entity identification process, or the “issuer” of these IDs, should be a “non-profit with a stable funding source and an open and transparent process”.
• The trade associations see benefits to a self-registration model in which legal entities would register a limited amount of information about themselves and then would certify that information periodically, or upon changes.
• They agree in concept with the identifier characteristics contained in the cross regulatory whitepaper entitled “Creating a Linchpin for Financial Data: The Need for a Legal Entity Identifier,” especially that the identifier be neutral (see our story on this soon).
• There should be a phased approach for adoption and all elements of the identifier should be carefully considered.

BVI Response This response highly favours the ISO route and is supportive of a freely available identification scheme on a global basis.

• Agreement that a legal entity identifier is a desirable goal and reference is made to the systemic risk monitoring benefits of such a move.
• An identification standard should take into account global coverage and there should “ideally” be only one international regulated reference data utility (including a reference to the European Central Bank president Jean-Claude Trichet’s views on the subject).
• Direct reference to ISO standards as a basis for the identifier.
• The ID issuer should be “an experienced entity offering high quality services on a not for profit and at cost basis” that has a governance structure with representation from “multiple industry sectors”.
• These identifiers should be freely available with an “automatic royalty free license”.
• General agreement with the Office of Financial Research’s basic tenets of such an identifier, stating: “The existing ISO identification standards – perhaps with slight modifications to their databases – should be able to accommodate these needs.”

DTCC Response This response reads like a CV, identifying the DTCC as the most suitable provider in the market for the job of reference data utility.

• Agreement that a legal entity identifier is a desirable goal and reference is made to the systemic risk monitoring benefits of such a move – also a nod to the role of “private industry”.
• Describes the DTCC as a “centrally positioned financial market utility that is user-owned and operated on an at-cost basis” (as required under the proposals for an issuing body) and refers to its eagerness to participate “significantly in these initiatives as they evolve”.
• There follows a fairly comprehensive rundown of how DTCC could operate as the central utility to store this legal entity data, with reference to its: data storage capabilities and experience; governance structure and operating infrastructure; and global coverage.
• It suggests that this data could be gathered either by the submission of a “bulk list of entities” (read counterparties) by systemically important financial institutions for validation and the assignment of identifiers, or by individual entities requesting identifiers for themselves.
• There is a direct reference to Avox’s Wiki-data resource as a complement to this work.
• Support of the need for ISO standards to be used because: “Using an ISO standard will reduce costs, eliminate inefficiencies, and increase automation.”
• It suggests that it could work closely with Swift and refers to its Bank Identification Code (BIC) initiative as a possible identification standard to use as the foundation to this work. However, it also refers to Avox’s own AVID as a potential contender. The decision, it contends, should be left to the market to decide.

BBA, JWG and UCL Response The bodies involved in this response display a high degree of caution about the introduction of an identifier that seeks to do too much, too fast. The stress is placed on a step by step approach that takes into account all players in the financial markets (beyond just data managers and regulators).

• A global standard is important and international consistency is vital.
• The right scope should be adopted with efforts initially focused on the wholesale business to begin with.
• A single utility may not be the answer as it could represent a systemic risk as a single point of failure itself.
• Relevant experts within financial institutions need to be consulted directly for their input – including those outside of the data management world, so downstream users of data also.
• A number of specific operational challenges are highlighted within the response including the need for a “lightweight” standard and concerns regarding data quality and maintenance.

American Benefits Council Response This response is focused on one particular challenge within the US pension funds industry and is perhaps reflective of the wider challenge the Treasury agency faces in seeking to introduce an identifier to suit all needs. The proposed clause could therefore be the sign of things to come.

• Highlights the potential challenges of assigning one legal identifier to a pension trust with sub-components, all of which could be considered to be separate legal counterparties to a dealer. The focus is on the “practical and legal complications” of this endeavour in this context.
• Legal challenges exist, for example, with regards to the Employee Retirement Income Security Act (ERISA) of 1974, according to the group: “it could prevent ERISA pension plans which hold their assets in non-pro-rata trusts from being able to enter into important hedging positions to protect the assets of specific pension plans in a pool”.
• It therefore suggests adding in a clause for these pension funds by “permitting such entity to identify individual sub-components with hyphenated numerical identifiers for every non-legal entity on whose behalf such entity trades”.

GS1 and Financial InterGroup Response Much like the DTCC response, this one takes the form of a job application for the role of identification standard provider on the behalf of GS1, which is currently used as the foundation for UPC barcodes in the retail world.

• It promotes the use of the GS1 system as the solution for legal entity identification, as well as financial instruments and financial events, thus extending the proposal to the whole area of reference data.
• It promotes a two step issuing process, with the first based on a user obtaining a GS1 company prefix from GS1, and then the subsequent individual financial IDs being created by the individual users based on this prefix. This is the means by which individual barcodes are created in the world of retail.
• It also promotes the decoupling of the process of issuing an identifier from the process of registering and verifying reference data. Rather than a single utility, it is therefore suggesting the establishment of multiple, federated registration authorities, which would act as “a single worldwide resource”.

Schwartz & Ballen Response This response purports to represent a range of financial institutions with whom Schwartz & Ballen work, including “banks, insurance companies, securities firms and organisations that provide electronic and paper-based payments clearance and settlement systems”. It appears to be a US centric response, with the suggested IDs

• The proposed identification standard is the Taxpayer Identification Numbers (TINs), which are issued by the US Internal Revenue Service (IRS).
• The benefits of this include that it is a system of identification that already exists and that it covers all firms in the US or those that deal with the US (hence it is US centric).
• It suggests that the Office of Financial Research should provide additional guidance to financial companies as to types of agreements it will regard as financial contracts and refers to the definition of qualified financial contracts defined by the Federal Deposit Insurance Act (FDIA) as a starting point.

D&B Response Another in the vein of job applications for the position of utility provider, D&B’s response highlights its credentials as a provider of the Data Universal Numbering System (DUNS) to be able adapt this identifier to the requirements of the Office of Financial Research. Short and to the point, the letter indicates the willingness of the vendor to enter into talks about these proposals in the future.

• D&B highlights its credentials in the utility context with the nine digit DUNS identification system for legal entities. “The DUNS Number is widely used by both commercial and federal entities and was adopted as the standard business identifier for federal electronic commerce in October 1994. The DUNS Number was also incorporated into the Federal Acquisition Regulation (FAR) in April 1998 as the Federal Government’s contractor identification code for all procurement related activities,” it states.

ICBA Response Unsurprisingly, as this association represents US community banks, the focus is on using current US focused identifiers for the purposes of monitoring systemic risk.

• It suggests that the identification scheme currently used by the Federal Reserve for banks, bank holding companies and affiliated entities should form the basis for identification of regulated entities within the domestic banking system. “For FDIC-insured financial institutions and related entities, a prefix attached to its existing Federal Reserve identifier would suffice to create a new identifier compatible with any system to identify entities not currently covered by the Federal Reserve scheme,” it states.
• The association suggests that some level of hierarchical data about the entity should be included in the identifier: “whether it is independent (top-level) or affiliated with another entity”.

American Bankers Association Response The ABA response raises some concerns that the association has regarding the details of legal entity identification, such as the term “life of an entity”, and suggests that in some instances, these details should be left up to the industry’s discretion rather than being mandated. It also represents one of the responses that asks more of the identifier, in that the ABA is keen for hierarchy data to be included.

• An identification standard should take into account global coverage and should be universal and inclusive of all entities.
• It wants clarification on the term “life of an entity” via the provision of some scenarios and examples by the Office of Financial Research to this end. “For example, how would an LEI be treated when there are changes to an entity because of a spinoff, merger, or change in corporate name, to cite a few examples?”
• ABA recommends that a requirement to flag a record when a legal entity is no longer active should be added.
• It also asks for further clarification of many of the other terms used in the proposals such as “counterparty” and “financial contract”.
• It suggests that some level of hierarchical data should be included in order to identify the “linkage, and reflect changes to the linkage, between a parent legal entity and a subordinate legal entity”.
• The ABA is not concerned about whether the utility is operated on a not for profit basis, but it suggests that instead the focus should be on ensuring it is “sustainable and economically viable”.

Mendelowitz’s Response This response points out the potential disparity between the proposals for the Office of Financial Research and the Dodd Frank reforms, including the structure of the body itself. It suggests that the not for profit element of the proposals may need revisiting due to the need for statutory powers for implementation.

• It raises concerns about the proposed organisational structure of the Office of Financial Research and asks for these to be revisited.
• It suggests that “proposed characteristics of such identifiers should be treated only as indicative, rather than as a final list of essential criteria,” hence these characteristics should be revised. For example, the idea of an ID persisting over the life of an entity.

SAS Response This response highlights the concerns that the vendor has regarding the risk management considerations of introducing a new legal entity ID.

• SAS is concerned that the creation of a universal legal entity ID will create “a false sense of security as to identifying parties to transactions, without addressing the real issue”.
• The regulatory community therefore needs to stress that the introduction of such an identifier is only a “first step” in addressing systemic risk monitoring.

MBA Response This response seeks further clarification on a number of items contained within the proposals, including the overall scope of the effort – what exactly the new ID system will cover.

• MBA is recommending a pilot scheme in order for the Office of Financial Research to be better able to determine the data items it will require.
• It suggests that existing IDs could be used, rather than introducing a new system.
• Much like the ABA, it is seeking clarification on the key terms within the proposals.
• It highlights the paper-based nature of the real estate finance industry and therefore the potential costs of moving to an electronic ID system, which it describes as “significant”.

CSBS Response Another rather US centric response, highlights the potential for the identifier to be based on the current unique identifier that is granted to residential mortgage loan originators and companies, which allows supervisors to track mortgage providers across the US.

• CSBS highlights the Nationwide Mortgage Licensing System & Registry (NMLS) unique identifier structure as a logical framework for building an identifier upon.

Dillard’s Response This response highlights the potential challenges involved in identifying public-private partnerships such as those related to pension funds. Rather vague in its feedback, it suggests that such an ID system needs to be as inclusive as possible. ANNA Response In the vein of many of the other contenders to the identifier issuer throne, ANNA details its capabilities as an issuer of the Issuer and Guarantor Identifier (IGI), along with the other national agencies in its network. “The National Numbering Agencies are the market experts for security numbering and identification,” it states.

• Reference to the current new draft ISO standard 16372 (currently in voting process until 15 April 2011), which could be the basis for a legal entity ID. ANNA could act as the registration authority.

Bank of England Response This response is short but stresses the need for a “globally accepted” and “publically available” identifier, as well as referring to the current work going on in Europe to support the European Systemic Risk Board (ESRB), which should be factored into the equation. “Any globally coordinated solution to this issue will need to encompass the views of regulators, standard setters and those working in the financial industry in order to achieve a collaborative solution,” states the response. ACLI Response Again, another short statement of support on behalf of the US life insurance industry, with the qualification that the new ID system should not be “cumbersome”.

• It is imperative that the system be efficient and cost effective, so as not to interfere with the ability of market participants to conclude business dealings in a timely fashion.
• Every effort must be made to use current identification systems, rather than introducing a new one.

ISO Response This response highlights the work of ISO’s TC 68 group in the area of entity identification and suggests that this work could be “leveraged” by the Office of Financial Research in this endeavour. The group’s position as an international body is also underlined, as well as the independence of its governance process. ASC X9 Response This response is in keeping with the ISO response and is supportive of a global initiative. It also highlights the need for further clarification of many of the key terms in the proposals.

• The identifier should be international in scope.
• The issuer should be not for profit and operated on a cost recovery principle, but that these costs should be sufficient to maintain the utility. “Importantly, we believe the final Statement of Policy should not mandate that end-users bear none of the cost of the entity. There are other issuers of identifiers (BIC) that charge users a licensing fee and a fee for purchasing a directory; this may be an important part of ensuring the system can be appropriately paid for,” it states.
• Much more work needs to be done to identify the right key minimum elements and their definitions; for example, what do the proposals mean by location?
• There should be a deadline set as to when all active trades are required to include a legal entity ID.

ECB Response Unsurprisingly, given the ECB’s prominence in the debate thus far about the introduction of a reference data utility, this response is supportive of the OFR’s goals. ECB president Jean-Claude Trichet has discussed the need for a “public reference data utility” that could provide “standardised information on instruments and entities that would be operated on the basis of an international agreement” in various public forums.

• The endeavour should be international in scope: “globally accepted and agreed”, hence should be discussed in an international forum – reference to the G20 as an appropriate example.
• The response lists the potential benefits from a regulatory perspective of being able to track this data cross border.
• The initiative needs to be based on a “solid and balanced, non-profit, governance structure”.

Interactive Data Response Interactive Data is also pitching its capabilities as a data vendor to support the work of the OFR, thus highlighting its various data solutions such as its fixed income analytics expertise. Unsurprisingly, the vendor is wary of the ID issuer being or becoming a commercial organisation.

• The entity ID should be alphanumeric and “should be a single, unique integer value, coupled with appropriate qualifying attributes and/or markers”.
• The issuer of the IDs should not be a commercially run organisation or affiliated with one – a list of the potential dangers of the body appointed with this role taking advantage of its position.
• Concern about fees: “We request that the final statement specify that fees should not be imposed on end users or the third party service providers with whom they may contract to receive legal entity identifier data.”
• A global context should be considered.

Euroclear Response The practical aspects of introducing such an identifier are highlighted by the ICSD, which is in favour of multiple data utilities in regional contexts.

• There doesn’t need to be one single utility for a global context – a federated model is preferred due to the need for “proximity” to the markets being served.
• Current initiatives such as those by ISO and Swift should be considered.
• Highlighting of potential reporting challenges from a practical level.
• More time is needed and the 15 July deadline is too short.

CGS Response As another contender to the identification issuer throne with its Cabre ID, which was jointly established with DTCC owned Avox, this response represents CGS’ job application for the role. It therefore includes details of the vendor’s “practical experience in global data operations and standards development”.

• Background about CGS and its experience of issuing Cusips on behalf of the ABA, as well as its entity ID credentials with credit derivative entity IDs (RED codes) and loan entity IDs (Markit’s MEIs). A history lesson on its global standards development endeavours.
• Reference to its involvement in the IGI initiative with ISO. Promotion of the notion of ANNA and the national agency networks (of which CGS is one) as the issuers of the IDs.
• Indication of the challenges ahead and acknowledgement that the IGI might not be ready in time…so why not look at the Cabre? A breakdown of the Cabre’s credentials and its potential to be interoperable with another standard set (in the form of the IGI).

Bloomberg Response Much like the other data vendor responses, Bloomberg demonstrates concern that the IDs themselves should be royalty free and the fees charged by the issuer should not be “excessive”. It takes issue with the idea of a non-profit body acting as the issuer and the idea of introducing new standards across the board, however.

• The IDs should be royalty free and the issuer should not charge excessive fees.
• A consensus-based standard might not be the best option – hence some existing standards should be used in some cases to keep costs down. Mapping between standards is the desired option in this case.
• A non-profit body might increase the costs of these IDs – references made to current non-profits that charge high fees. Instead, a commercial body could be compelled to charge “reasonable” fees.
• Persistence over the life of an entity may cause operational challenges for IDs, hence they should be replaced with new IDs in the case of a merger, for example.
• Parent/child or “connections” data should not be made public.

Swift Response Given its position as a non-profit organisation, this response is targeted at proving Swift’s credentials in the race to be involved in the utility. It also references its Bank Identifier Code (BIC) initiative as a potential contender in the entity ID stakes.

• Reference to its credentials as a non-profit organisation and the BIC initiative under the auspices of ISO standards development in the entity ID space. The model currently used by Swift for granting free public access to its database of Swift issued BICs could function “just as well” for legal entity IDs, states the response.
• Agreement with all the tenets set out in the proposals.
• A proposed partnership with the DTCC to act as the utility provider to the market is expounded upon. The qualifications listed include: its position as a non-commercial organisation; its openness; its expertise; its operational soundness; the universal nature of the BIC; the BIC’s potential for expansion; and cost efficiency.

Arvest Bank Response Arvest Bank’s response indicates a desire for more clarity about what the ID would cover and its purpose. Indicative of how many domestically focused institutions may react to the proposals, this response highlights concerns about the exact wording.

• Questions the terminology used – ‘not for profit’ versus ‘not for profit basis’ – lack of clarity is a concern.
• Does not support the notion of a not for profit entity being more cost effective or a better guarantor of data quality. Also concern about the introduction of a monopoly provider.
• More definition needed about the potential use of the data that is made publicly available.

Bansal Response A very short response highlighting three issues including the need for elaboration on the handling of: corporate actions; mergers; and splitting of an entity. Yang Response A very brief response that suggests the OFR should look at current best practices for identification of entities within the 10 largest firms in the market, plus a few notes about how such data may develop over time. Muttyal Response Muttyal is a business analyst working with IT services vendor Wipro Technologies in the US and his feedback represents technical advice about the structure of the legal identification code.

• He notes (in a postscript) that the endeavour should be globally focused.
• He stresses the importance of metadata and discusses two potential models for the identifier in terms of either including parent hierarchy data or not.
• The issuer body should be governmental or “autonomous”.
• The child company should be required to identify its parent company.
• Penalties should be in place to compel these reporting requirements to be followed.
• The cost of setting up the programme “would be less than that of setting up a public trading exchange”, he contends.