Why the Industry Wants Better Financial Data

A recent Wall Street Journal article, “Regulators Want Better Financial Data,” rightly notes that improving the quality of financial data is vital to managing systemic risk in the financial system. But it’s not just regulators who see a benefit in measuring interrelated risk in the financial system- it’s a top priority for the financial industry as well.

The Wall Street Journal article covers the highlights of a speech given by Richard Berner, director of the Office of Financial Research at the U.S. Treasury, who makes the key point that “We can’t analyze what we can’t measure. The financial crisis revealed that the data available to monitor the financial system were too aggregated, too limited in scope, too out of date, or otherwise incomplete.” In his speech, Mr. Berner references perhaps one of the most important new tools for solving this data problem: the establishment of a global legal entity identifier, or LEI, system.

Both regulators and the industry have been aggressively working to implement an LEI system, though this new tool often gets overlooked by mainstream media. While it may sound technical, the LEI concept is quite simple: every financial firm should be required to have one consistent identification code (the LEI) – similar to a social security number — that is used anytime the firm enters into a financial transaction or trade. Similarly, any entity that engages in a transaction with a financial firm should also be required to have an LEI.

Just as an individual could be named Margaret, called Maggie, and get a new last upon marriage, the same thing could happen with a financial firm that could be referenced as “Lehman Brothers” on one transaction, “Lehman Brothers Holdings” on another, or become something entirely different after a merger or acquisition. Without a standard way to identify entities engaged in financial transactions, it becomes more of a challenge to measure the total exposure of one organization to another and in turn end the concept of “too big to fail.” The LEI initiative will dramatically improve systemic risk management by providing regulators and firms with more complete and accurate data on exposures in the financial system.

Of course, in order for this effort to be successful, the LEI system needs to be global. Financial firms operate in a global marketplace, so their LEI must be consistent not only in the firm’s home country or region, but in any place where it does business. Not only will this make it easier for firms to aggregate their exposure across borders, but regulators will find it easier to coordinate as well. As Andrew Haldane, executive director of financial stability at the Bank of England, has said, an LEI will create a “common language” across borders.

The G-20 has recognized this as a key priority and the Financial Stability Board is actively working to establish a global LEI standard. SIFMA, through our global affiliate GFMA, has been leading on this effort and remains very supportive of the FSB. We hope to see continued progress on this initiative over the next year. To help global regulators, GFMA in 2011published the global financial industry’s thoughts on how to best structure such a system.

Here in the U.S., the Dodd-Frank Act called for the establishment of common identifiers that are currently being used in the derivatives markets with the goal of expanding them to other markets and products in the near future. Since the global LEI standard is not yet finalized, the CFTC is requiring the use of “Pre-LEIs” that will ultimately conform to the global standard. Without a global standard, we’ll end up right where we are today, with a fragmented system of identifiers that varies from firm to firm and region to region.

Moving forward, SIFMA will continue to support the global LEI effort as part of the industry’s broader goal to ensure the resiliency of our financial system.

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Tom Price – Managing Director, Operations, Technology and BCP, SIFMA
David Strongin – Managing Director, Cross-Border Policy and Advocacy, SIFMA