The lack of a standard identification system for financial counterparties makes it difficult for financial firms to develop a consistent and integrated view of their exposures, such as in the case of default of counterparty. This is a challenge not only for firms, but also creates an obstacle for regulators to aggregate and share information to effectively monitor risks.
Around the globe, regulators and firms are considering ways to overcome this fragmented system and create common identifiers. The importance of creating a common system of identifiers has been recognized in statements by the Financial Stability Board, IOSCO, and G-20 finance ministers and leaders (PDF). In the United States, Dodd-Frank mandated initiatives to create standard LEIs. The main effort is being driven by the Office of Financial Research (OFR), with the Commodities and Futures Trade Commission (CFTC) also issuing LEI standards around derivatives. The OFR has issued a statement regarding its preference to adopt through rulemaking a universal standard for identifying parties to financial contracts that is established and implemented by private industry and other relevant stakeholders through a consensus process. Regulators in Hong Kong, Canada, the Australian Securities and Investments Commission, as well as the International Organization of Securities Commissions, have all recognized the importance of developing a unique LEI.
SIFMA and others are working to help identify and develop an industry consensus LEI solution which regulators around the globe can endorse. Our goal is to work to develop a globally acceptable solution which can be the foundation for future LEI efforts in other jurisdictions, and we are working closely with global firms and trade associations as part of the process.
On May 3, SIFMA and 12 other trade associations released “Requirements for a Global Legal Entity Identifier (LEI) Solution” (PDF) outlining an industry consensus perspective on how the LEI system should work and requirements for the future potential LEI provider.
To help identify providers who could deliver this new LEI infrastructure, the Trade Associations & SIFMA launched a Solicitation of Interest (SOI) process on May 13, to solicit responses from potential solution providers interested in delivering an LEI solution. It outlined a specific set of questions and prerequisites for potential providers, based on the LEI Requirements Document and other policy statements from regulators and industry participants.
The intent of the SOI was to assess the capabilities of providers against the expectations defined in the requirements document, and use that assessment process to deliver an industry recommendation of one or more solution providers. It drew on the experience and expertise of a diverse group of industry experts, who evaluated the submitted proposals.
The SOI & evaluation process culminated in the July 11, 2011 recommendation for the LEI Solution Providers. Specifically:
- Standards Body: The International Organization for Standardization, i.e., ISO’s new standard, ISO 17442, is recommended for use as the new, authoritative legal entity identification standard.
- Core Issuing and Facilities Manager: The Depository Trust & Clearing Corporation (DTCC) and the Society for Worldwide Interbank Financial Telecommunications (SWIFT), along with DTCC’s wholly-owned subsidiary AVOX Limited, are recommended as key partners to operate the core LEI utility as the central point for data collection, data maintenance, LEI assignment, and quality assurance.
- Federated Registration: ANNA, through its network of local national numbering agencies (NNAs), is recommended as a key partner in the solution for registering, validating and maintaining LEIs for issuers, obligors, and other relevant parties in their home markets. The NNAs are envisioned to serve as the “face” of the LEI utility to those markets while leveraging the functionality of the centralized LEI utility for the assignment, further validation and global distribution of LEIs.
SIFMA and the other trade associations involved in this effort believe that the LEI standard, issuance capability and management solution outlined above represents a powerful foundation upon which the remaining aspects of an LEI system, such as governance, can be built.
Learn More: See additional details on the recommendation and the evaluation process. (PDF)
The objective of the Trade Associations was to develop an international consensus-based recommendation for a single, uniform, and global LEI Solution. Having a single, universal identifier is the most important element in any LEI system. Only with a single, universal LEI standard will global regulators, supervisors, and private firms be better able to measure and monitor systemic risk and counterparty exposure. The recommendation was made in early July 2011 to ensure that a solution is available for use when regulators begin to adopt new rulemaking around the globe that benefits from the use of an LEI. The Trade Associations have subsequently delivered a letter to G-20 finance ministers requesting support for our recommendations.
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It is extremely important that regulators coordinate disparate Legal Entity Identifier (LEI) efforts taking place across regulatory agencies and across jurisdictions – creating a single LEI standard across regulators will allow for more effective regulatory oversight and be more efficient for firms. We appreciate the Office of Financial Research’s (OFR) outreach to foreign regulators, as a globally coordinated approach will be necessary for effective implementation. SIFMA and the financial industry are committed to finding the right solution for an LEI standard, but we are working on a very tight timeframe and hope that pre-existing deadlines do not prevent us from developing the right structure to meet policy goals.
SIFMA believes it is critical that regulators consider the following preliminary concepts, as we begin the rulemaking process:
- Global coordination is critical to developing a single LEI standard which can be used internationally, making this a powerful tool for firms and regulators to manage and monitor systemic risk;
- Regulators should clearly define who is responsible for obtaining an LEI, and preliminarily we 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;
- SIFMA agrees in concept with the LEI characteristics contained in the cross-regulatory whitepaper entitled “Creating a Linchpin for Financial Data: The Need for a Legal Entity Identifier,” especially that the LEI be neutral without any embedded intelligence;
- The data elements for the LEI process should be considered carefully and should likely include some corporate hierarchy information;
- It is important to have a carefully thought out strategy to phase in the use of LEIs;
- The entity responsible for the LEI process (the LEI “issuer”) should operate on a non-profit or an at-cost recovery model, with a stable funding source and an open and transparent process;
- Data should be freely available, without restrictions on reuse or redistribution, and in line with any jurisdiction’s regulations on privacy.
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