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LEI Development Embraces Change and Picks up Speed Ahead of G20 Meeting

The Financial Stability Board’s (FSB) third progress note on the legal entity identifier (LEI) initiative, released last week, has met with a positive response from those involved in shaping the system, potential infrastructure providers and market data vendors, despite changes to some proposals and the collapse of perceptions that have built up during debate on how the final system could shape up.

But while progress is positive, there are still fundamental concerns around corporate hierarchies, as without agreed reference data on legal entity parent and relationship information, the LEI will not fulfil the effective risk aggregation function at the heart of the global system development.

The decisions and to-do lists outlined in the FSB progress note are significant steps forward in developing a global LEI system and come ahead of another major milestone this week when G20 finance ministers and central bank governors meet in Mexico City and will be asked to endorse a draft charter for the system’s Regulatory Oversight Committee (ROC). The charter has been drawn up by the FSB Implementation Group (IG) and is expected to be approved by the G20 meeting, setting in motion the creation of the ROC and the global LEI foundation that will underpin the Central Operating Unit (COU) and secure a governance framework designed to sustain the public good of the system.

One of the late changes identified in the progress note is a shift away from perceptions that entity identifier codes would be 20-character random numbers. Instead, the note describes a part-structured, part-random character string resulting from an ‘urgent’ request made by the FSB IG in September for the FSB LEI Private Sector Preparatory Group (PSPG) to consider how identifiers could best be issued for the purposes of a federated, global LEI system. The PSPG’s views were considered at meetings of the PSPG and IG in Basel earlier this month and a technical specification has been endorsed by the FSB plenary.

The FSB states in the progress note: “The FSB decision is provided now to deliver clarity and certainty to the private sector on the approach to be taken by potential pre-LEI systems that will facilitate the integration of such local precursor solutions in to the global LEI system.”

On the basis of the arguments presented and discussed by the PSPG, the FSB has selected a structured number as the best approach for the global LEI system, although it acknowledges that the 20-character code, which complies with the existing ISO 17442 standard, will have no permanent embedded meaning. Instead it is aimed to avoid any overlap of random numbers in a federated issuing system by adding a code for each local operating unit (LOU) assigning LEIs in front of the numbers.

The breakdown then looks like this:

· Characters 1-4: a four character prefix allocated uniquely to each LOU

· Characters 5-6: two reserved characters set to zero

· Characters 7-18: entity-specific part of the code generated and assigned by LOUs

· Characters 19-20: two check digits as described in ISO 17442.

If this information has been a long time coming, the time to organise behind it is short with pre-LEI solutions wanting to transition into the global LEI system required to adopt the numbering scheme no later than November 30, just a month away. The LEI will be portable within the global LEI system, implying that the LEI code can be transferred from one LOU to another and that each LOU must have capacity to take responsibility for LEIs issued by other LOUs.

Following recommendations on data quality achieved through self-registration of legal entities in the FSB’s June 2012 report, the FSB goes on to decree that pre LEI-services should be based on self-registration, although this can include third-party registration made with the permission of the entity to be registered, and that from November 9 all pre-LEI systems must allow self-registration only.

No specific recommendations are made on how the Commodity Futures Trading Commission’s (CFTC) CFTC Interim Compliant Identifiers, or CICIs, which are entirely random numbers, will integrate with the LEI system, although the 27,000 or so already issued are expected to be grandfathered and accepted into the system without being restated.

Commenting on the LEI number structure, Peter Warms, global head of ID and symbology development at Bloomberg, says: “But for the prefix that identifies where the number was assigned from, the number is still random. This is good for data management practices as the number has no other data dependencies. I would question, however, whether the prefix of an identifier would be changed if it is moved to another LOU as this is not clear.”

Tim Lind, head of legal entity and corporate actions at Thomson Reuters, says: “We must put the debate on intelligent versus dumb numbers behind us and leave it as a milestone. Either solution could work and ongoing argument is not productive. The LEI principles are in place and we need to get on and get the work done.”

Both Warms and Lind applaud the advances made by the FSB and its working groups, but the need for speed remains if deadlines are to be met. And as the complex tasks of developing a legal foundation, ROC and governance framework for the LEI continue, Lind proposes a balance of perfection and pragmatism as the only way forward.

Another outcome of the Basel meetings that deflates earlier perceptions, is a clear indication that the COU will not be located in one central place, but will instead be distributed across several locations. This is likely to emanate from the FSB’s hard fought for and well held desire to ensure the LEI system is a collective development for the public good including a governance and operational framework that will encourage all jurisdictions to join in.

On the same basis, it has also become apparent that any suggestion that an LEI system could initially be based on a replica of the DTCC and Swift utility set up for the CFTC’s CICIs has been quashed. Instead, LOUs are expected to make their own technology choices to support the LEI – indeed they may already have systems in place – although they will, necessarily, have to conform with standards set by the COU.

If these are some of the recent gains in the LEI development, there is still much to be done ahead of having an ROC, COU and some LOUs in place by March 2013. Again sustaining a level playing field for the public good on a global basis, the FSB has asked the PSPG to build on initial work and consider the next phase of operational work that will focus on how the system can best address key issues in areas such as data quality, supporting local languages and characters, and drawing effectively on local infrastructure to deliver a truly global federated LEI system. The PSPG’s deadline to make proposals on these issues is the end of the year, generating the need for extremely swift action if the LEI system is to be up and running to any extent in March.

The final issue raised in the FSB’s progress note and one which has yet to be openly debated and resolved is ownership and hierarchy data associated with LEIs. The note states: “Addition of information on ownership and corporate hierarchies is essential to support effective risk aggregation, which is a key objective for the global LEI system. The IG is developing proposals for additional reference data on the direct and ultimate parents(s) of legal entities and on relationship (including ownership) data more generally and will prepare initial recommendations by the end of 2012. The IG is working closely with the PSPG to develop the proposals.”

This might be the FSB’s final note, but the issue has to be a top priority. As one observer puts it: “The next big thing is hierarchies. They need to be nailed down and there needs to be transparency. Work is being done on this, but without a good solution there will be no meaning in the LEI.”

Source: Reference Data Review, 29.10.2012

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News and updates on LEI standard progress and development

As a follow up on G20 acceptance in Los Cabos in July 2012 and the Financial Stability Board guidelines and recommendations of the Legal Entity Identifier  LEI, we will regularly update this post with news and article to provide an overview of  LEI standard progress and development.

 
First Published  13.07.2012 , Last Update 27.09.2012

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Reference Data: LEI system Real and Ready for Use…or maybe not?

The morning after the G-20 leaders endorsed the Financial Stability Board’s recommendations for a global system of precisely identifying legal entities, the co-chairwoman of the LEI Trade Association Group said, “I think we have something that is real and ready for use.’’

Robin Doyle, a senior vice president at JPMorgan Chase, noted that 20,000 ready-to-use “legal entity identifiers” have already been generated by a prototype jointly developed by the Depository Trust and Clearing Corporation and the Society for Worldwide Interbank Financial Telecommunication. A copy of that file can be downloaded here.

The online portal that would allow financial market participants to register and receive 20-character ID codes and to search for the codes of counterparties or other entities was demonstrated Wednesday morning at the 2012 Technology Leaders Forum of the Securities Industry and Financial Markets Association.

That portal can be turned live “within 24 hours” of its need, said Mark Davies, 
Vice President, Business Development
 at The Depository Trust & Clearing Corporation, during the demonstration.

The LEI Trade Association Group represents a group of firms and financial industry trade associations trying to develop a global and uniform legal entity identifier. The group is supported by the Global Financial Markets Association, which includes SIFMA.

SIFMA and a variety of other trade groups have recommended that DTCC and SWIFT operate a central authority for registering and issuing the codes that the leaders of the G-20 industrial nations Tuesday endorsed.

The G-20 endorsed the 35 recommendations of an international coordinator known as the Financial Stability Board.

The board’s recommendations differed in one significant aspect from the SIFMA and trade association recommendation. Where the trade groups recommended a centralized system for registering and issuing ID codes – a point reinforced Tuesdya in opening remarks at SIFMA Tech by SIFMA president T. Timothy Ryan Jr. – the FSB recommended a “federated” registration model. Under that approach, local authorities, aka nations, could and theoretically would act as the agencies for registration, issuing and storing the codes.

The central authority would maintain a database that would be logically managed, but whose contents might be spread around the world, as on servers spread across the Internet.

“We think it can work,” but it has to be set up and maintained properly, Doyle said.

The federated model will only be as good as it adheres to the global standards set by the FSB and the International Organization for Standardization, which defined the 20-character code.

Doyle said a central authority under the FSB approach likely will need to conduct audits of local operating units, to ensure compliance with the overall standards. The challenge will be to make sure the codes are kept correctly and not, in some fashion, duplicated.

The local authorities will need to take on the expense of maintaining high standards. “It is an expensive, difficult process to validate data,” Doyle said.

“A public-facing system like this needs a huge amount of control,” Davies said.

The next shoe to drop on the development of the system will come within the next couple weeks. That’s when Commodity Futures Trading Commission member Scott O’Malia said a decision will be announced on what organization or organizations will handle the registration and issuance of ID codes for the swaps markets it will oversee. O’Malia said at SIFMA Tech Tuesday that the decision among what industry executives say are four competing proposals will come “very soon.”

Srinivas Bangarbale, the CFTC’s Chief Data Officer, said Wednesday that the regulator’s “interim compliant identifier” will support the ISO 17442 standard set out by the FSB and ISO. r

It’s decision to move ahead “presupposed the standard” and that the chosen implementing group would “adopt the standards as published.” The CFTC will not directly or indirectly create another set of reference data for the industry to keep track of

“It’s important to use the standard as soon as possible,” he said, however.

O’Malia said the CFTC is likely to begin issuing IDs as early as September. That is so the commission can fulfill its mandate to oversee interest-rate and credit-default swap markets, as mandated by the 2010 Dodd-Frank Wall Street Reform Act.

The FSB’s implementation schedule calls for a functional system to be ready to use by March 2013.

Source: Securities Technology Monitor, 20.06.2012 by Tom Steinert-Threlkeld

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