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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A global standardized Legal Entity Identifier (LEI) will help enable organizations to more effectively measure and manage risk, while providing substantial operational efficiencies and customer service improvements to the industry.
Regulators and financial firms globally have been exploring ways to overcome the current fragmented system of firm identifiers and creating a common identifier for financial institutions. The importance of creating a global system of identifiers has been recognized by the Financial Stability Board, the G-20, the Committee on Payment and Settlement Systems, and the Technical Committee of the International Organization of Securities Commissions, and is currently being addressed by the LEI Regulatory Oversight Committee (ROC), as well as the Global Legal Entity Identifier Foundation (GLEIF). Through a coordinated initiative between GFMA and other trade associations, the industry has been working with both the ROC and GLEIF to ensure development of a global system for the accurate and unambiguous identification of legal entities engaged in financial transactions.
A unique ID associated with a single legal entity, LEIs allow for consistent identification of parties to financial transactions, facilitating a consistent and integrated view of exposures. The establishment of an LEI system is a foundational and critically important element towards the improved measurement and monitoring of systemic risk. A global, standardized LEI will enable organizations to more effectively measure and manage counterparty exposure, while providing substantial operational efficiencies and customer service improvements to the industry.
Significant progress has been made on the FSB’s global LEI initiative. The LEI Regulatory Oversight Committee (ROC), established by the FSB, has endorsed 22 utilities that can produce LEIs that can be used for regulatory reporting purposes in countries represented on the ROC. There are a number of regulatory mandates in place that require use of the LEI, including swaps reporting regulations by the US CFTC and SEC; the Investment Industry Regulatory Organization of Canada’s debt securities transaction reporting; and ESMA’s Trade Reporting Regulation on OTC derivatives, central counterparties and trade repositories (EMIR). Regulators around the world in places such as Australia, and Hong Kong have also embraced the LEI concept.
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