LEIs will be crucial to improving the monitoring of systemic risk for regulators, however, financial institutions can also utilise this code for data aggregation to improve internal data flow and risk management, explains Darren Marsh of Interactive Data. Comments from the Podcast “LEIs – Increasing Usability & Benefits of the New Standardised Identifier.”
The introduction of a global and standardised Legal Entity Identifier (LEI) is primarily intended to provide regulators with the tools to monitor systemic risk. However, this new identifier, which will straddle all of the existing identifiers, can be used to support financial institutions with the enormous process of aggregating information from various sources and across the entire enterprise.
The LEI as a standalone code, doesn’t provide much benefit. Where the code could become very useful is when it is packaged with additional content, such as the underlying reference data and is used as a tool to aggregate different identifiers to support a firm’s business requirements.
Specifically, the fact that this code can be freely passed between firms, as well as firms and regulators, and can include all of the essential underlying information means that financial institutions can use it for aggregating information across the enterprise to achieve greater operational efficiency.
I fully expect the data vendor community to become the main distribution point for LEI, linking it in to existing data services. It is through this process that the LEI will proliferate firms’ databases and provide a standard for data comparison both across the internal databases and also when evaluating and implementing vendor feeds.
There are various potential operational benefits firms could achieve through linking the LEI code with other data. With the aggregation of data, there is the possibility to reduce the amount of reconciliation required across the internal databases and provide more interoperability across systems that run off of different identification schemas. From a clearing and settlement perspective, more accurate identification of counterparties could negate the amount of breaks in trades due to incomplete or inaccurate counterparty data.
When processing entity-level corporate actions information, for mergers and acquisitions notifications specifically, the LEI could eventually negate the need for firms to support complicated cross-referencing of data from different vendors across different proprietary identification codes. It could also, potentially, remove the need to match the information from the single instrument ID and then try and work it back up to the issuer level and then proliferate back down again to the entire instrument IDs that represent individual positions across the organisation.
Data linking via the LEI code can also help financial institutions improve data flow, data timeliness and risk management.
The LEI could also aid data aggregation by significantly reducing the amount of time needed to combine entity data from across business silos using different systems, in order to provide an enterprise-wide view of risk exposure. So, it strengthens the internal risk management process by being able to roll-up to a single name issuer for example, (or group of issuers) that represent the securities held in an investment portfolio or a fund.
Improved data aggregation also complements forward-looking risk metrics by providing a consistent view on an on-demand basis. And by providing these linkages at the beginning of the process, with greater data transparency, it is easier for risk managers to ascertain if a certain position is taken, whether it will increase exposure, break a client mandate or internal investment policy.
Aggregating data in this manner can enable organisations to have more accurate information available at the point at which they take an interest in trade. That information can then proliferate from the front through to the back office as well. So, this efficiency in data aggregation provides a consistent approach through each of the individual steps from indication of trade, through point of trade, through to clearing and settlement. In short, it provides a consistent view of this information across the trade lifecycle.
The other tangible benefit is that a firm will have a consistent view of risk exposures going forward. So if we see another single name event, for example the default of a major bank, it would be, in theory, much easier to understand who all the firm’s subsidiaries are and calculate what the total exposure is to that single organisation. With the Lehman Brothers default, many firms took three or four weeks to understand what their total exposure was to the organisation. Enhanced data aggregation removes many hurdles to that process and would significantly reduce that time frame.
The data flow, operational and risk management benefits through improved data aggregation achieved will vary by firm, but the usability of the LEIs extends beyond the code and will really come down to how it is harnessed as a building block for so much more.
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