OTC Derivatives Reform (Just one year ago you were probably aware of ISINs, BICs and/or SWIFT codes. But LEI, USI or UPI would probably have elicited a mere shrug. In the regulated world of OTC derivatives, these acronyms are the foundation for stringent and consistent regulatory oversight.
The Dodd-Frank Act mandated the creation of the Office of Financial Research (OFR) with the task to collect data from financial market participants to allow for enhanced visibility and transparency of a highly interconnected global market. The concept of a legal entity identifier (LEI) was adopted to facilitate this task by consistently identifying parties to financial transactions.
Some parties may be frustrated with another identifier having to go into the system, but let’s take a look at the design and proposed governance to better understand the benefits. Based on the ISO standard 17442, the LEI is a ‘non-speaking’ 20-digit alphanumeric identifier governed by a three-tiered structure of Regulatory Oversight Committee, Global Operating Unit and Local Operating Unit. It is a commonly accepted standard for the unique identification of financial counterparties. According to Tim Lind, head of legal entity and corporate actions at Thomson Reuters, he has “never had a conversation with customers – with anyone in the market – who said this was a dumb idea.”
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3 Comments to "OTC Clearing Part 6: The Power of LEIs":
ltabb
19 October 2012
Tom, Good article. And yes Tim is right, its not a dumb idea. Its just a hard idea to implement. Just lining up the customers is a challenge. But that said, it is the right thing to do. Without it, it will be very difficult to align exposures within and between organizations. It will be interesting to see how firms come up with a solution to say that Lawrence Tabb, Larry Tabb, Lawrence R Tabb, TABB Group, and TabbFORUM are all related. And that is just me. Think of someone like a global corporation or a fiduciary with relationships at 10 money managers who use 50 brokers and 30 custodians & sub-custodians. Becomes a real mess really quickly.
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agrody
22 October 2012
Having just come back from Basel after concluding an awe inspiring first time ever global meeting on the LEI it is heartening to know its all been placed on the table or rather at the feet of the G20's Financial Stability Board. A huge group of operations executives, data geeks, technologists and academics interacted with global regulators to bring clarity to the issues and propose some approaches to fix the plumbing on the way to risk adjusting the financial system. Stay the course and we may yet see STP in our lifetime.
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triesack
22 October 2012
Larry, thanks for your comment and might I dare say that "of course it's hard to implement". Otherwise we would have seen this implemented years ago. Why? Because entity data management is the proverbial pain in the ... for the financial industry. That holds true in relationships between firms but also and especilly within a firm. So, introducing an RFID-like tag for a financial markets participant is crucial. But (and this is a big "but") it is also difficult to implement and (depending on how you do it) very costly.
The quickest path to implementation is taking your repository (or rather repositories) of legal entities and map the LEI/CICI against it - amounting to adding a new field to an existing database. Then you would need to make at least your reporting solution speak "LEI" in a way that it reports the LEI as part of your reporting obligations. But it does not stop there as you probably need to have the LEI handy the moment you trade OTC derivatives.
I'd argue though that the smart thing to do would be to re-create your internal entity data management around the LEI as the core element. That of course is a far bigger ticket but could ultimately make your organisation's life so much easier as you could start looking beyong silo barriers and specific product lines (in our case OTC) towards a comprehensive holistic client view that would enable you to calculate couterparty risk correctly and get to the holy grail of customer relationship management - which is "cross-selling" across all products you offer!
But - this would mean a bold decision to do in such regulated and opaque business conditions. But, fortune favours the bold - so, I would counsel to at least trying to make a case for such a move.
What's your thoughts?
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