Stephen Koch, Senior Director, Pricing & Reference Data at Interactive Data Corporation, offers five steps financial institutions should follow to ensure a successful integration of LEIs into workflows.
The legal entity identifier (LEI) is a welcome move toward improving the identification of participants to financial transactions. While the primary driver behind creating this identifier is the need for regulators to improve oversight of systemic risk, there are secondary drivers, which have created support among many financial participants. Financial firms are just beginning to explore the utility of this identifier beyond its initial intended purpose. While the debate may continue about the best way to implement the LEI, most participants have not only resigned themselves to its creation, but are actively supporting it. As firms think about bringing the LEI into their workflows, we propose five steps for a successful integration:
First, every firm, if they have not done so already, should take the time to understand what the LEI is, and what it does or does not provide. It is important to understand that the LEI is intended to be an unambiguous identifier for the entities that are participants to a financial transaction. It is intended to replace the ambiguous, freeform name and address fields that most firms and regulators currently contend with. However, the LEI does not identify securities issued by a legal entity, nor does it explain the relationships between entities (e.g. parent/subsidiary, affiliates or other hierarchical relationships).
Second, it is extremely important that each firm reviews the current state of counterparty data within their organisation. Ask yourself these questions: how is entity data currently being stored at our firm? Is it easily accessible in a separate entity database, or is it more difficult to extract because it is mixed with other reference data? If separate, is it being held in a central depository or duplicated in separate silos? Understanding where and how your counterparty data is stored enables you to better understand where your systems will have to go.
The third thing to look at is how and where counterparty and issuer data are used today. Cataloguing current uses such as trade comparison, risk analysis and portfolio management, is essential to prepare for step four, which is defining the use cases for the LEI going forward.
The most obvious use cases for the LEI are driven by regulatory requirements. It is critical when building use cases to first identify the effective dates for compliance with applicable regulations.
Developing other use cases may be as simple as looking at how to improve existing processes by substituting the LEI for freeform entity text descriptions. For others it may be more complex as these use cases may only be partially addressed by the LEI in its current state and may require additional data. For example, it may be necessary to supplement the LEI with additional external data such as in Interactive Data’s Business Entity Service, to understand the linkages between issuers and their securities and the hierarchy of an organization’s legal entities.
The most difficult use cases require discussions about difficult processes never undertaken or previously abandoned because a tool like the LEI did not exist. For example, organizations will be able to analyze bonds based on lead manager, guarantor, obligor or custodian, all entities currently identified in freeform fields, once these entities are identified with an LEI. This will allow them to better assess their exposure to an entity regardless of the entity’s role. Additional use cases may be identified after the establishment of the LEI. It therefore makes sense at this stage to reach out to all the internal business units to identify as many use cases as possible.
The last step in preparing for the LEI is to create a plan. With the above information collected and the use cases created, prioritizing each use case is paramount. Regulation will help prioritize some of the use cases e.g. if a regulatory body is requiring use of the LEI by a particular date, then all work needs to accommodate that deadline.
Prioritizing other use cases will be decided based on the current criteria your firm uses whether that is ease of implementation, improvement of service or efficiency vs. cost of implementation; keeping in mind that it may make sense to overlap development.
The LEI is not a panacea. It is not meant to be. Rather, it is meant to be a tool, and one that we believe can transcend its initial intended purpose. To fully capitalize on this identifier, though, takes preparation and planning. By following the five steps outlined above, financial firms will be in a much better position to fully tap the potential of the LEI.
For more information, please visit http://www.interactivedata.com/lei/ or email eu-info@interactivedata.com
