Mark Davies, head of Avox, reviews the evolution of LEIs in 2013 and offers insight into the challenges financial institutions face as they move forward with the identifier.
We have seen some significant steps towards establishing the global Legal Entity Identifier (LEI) system in 2013 with the registration of over 90,000 pre-LEI codes, or CFTC Interim Compliant Identifiers (CICIs) and active use of these codes to report to trade repositories (TRs) as needed to meet trade reporting requirements under Dodd-Frank. The CICI Utility utilizes Avox expertise and validation capabilities as a key quality differentiator for their product. The CICIs issued are now valid for reporting not just to the CFTC but under the global LEI system as well. Over the next two years, this evolution of LEIs will continue to support trade reporting under EMIR in Europe and eventually to support requirements for trade reporting beyond the swaps markets and for other asset classes.
A key factor contributing to the success of the LEI standard so far has been the communication between the regulatory community and industry, but this level of communication needs to continue. We now have an industry regulatory sub-committee, which has 55 members and 17 observers, and there is also a great deal of regulatory interest from many different jurisdictions around the globe so this collaboration is likely to grow. This level of communication shows industry and regulatory participants both clearly recognise that the use of the LEIs is essential to improve efficiency and accuracy in reporting and are very focused on driving adoption and further development of this standard.
Looking ahead into 2014, LEIs will be used for identifying counterparties and trade reporting to the TRs as required under EMIR early in the year. However, other regulators in different jurisdictions, such as Hong Kong, Singapore, Australia and Canada also plan to use LEIs for swaps reporting.
Of course, adopting this standard introduces some challenges for financial institutions. The biggest challenge firms face is around ensuring the accuracy of the underlying data. It is fair to assume that 15-20% of all legal entities will go through some change on an annual basis and that is a relatively high percentage when you think of the numbers of the LEI codes that will be issued. Whether it is a change of name or ownership, all the reference data associated with each code needs to be well maintained and we see these challenges at Avox. Only with accurate and consistent identification of legal entities will firms have confidence that they are reporting accurately to the regulator. The next step for LEIs is to start bringing in hierarchies and ownership information together to clearly identify the inter relationships between different organisations, but such analysis can only be possible if the entity data is up-to-date.
Another challenge is maintaining the uniqueness of the codes to ensure there is only one version of each company in the global system. Uniqueness is a key quality consideration and something that the regulatory oversight committee has spent a lot of time looking at. To ensure uniqueness, each LEI issued must retain the identity of the same company over time so that the system and the identifier remain consistent. Every firm with a LEI code has a responsibility for ensuring that the information relating to their own company is accurate and up-to-date. But firms should also remember that use of these codes will help with internal risk management procedures to analyse counterparty risk exposures, so there are very tangible benefits behind the move to support LEIs and the standardisation it provides.
For many, the focus in 2014 will be on addressing the data management challenges that arise from working through strategies to support use of LEIs and to meet regulatory trade reporting requirements. I do think, however, it is important for the industry to remember that these identifiers are more than just about data management – they are the linchpin needed to establish a global legal entity identifier system which will improve the monitoring of systemic risk for financial institutions far and wide.
