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08:05 AM
Allan Grody
Allan Grody
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LEI + COU = GLEIS

The legal entity identifier (LEI) project has been off to a rough start. The newly installed board of the Global Legal Entity Identifier Foundation (GLEIF) intends to bring structure and guidance.

The Global Legal Entity Identifier System (GLEIS) is supposed to be a game changer. Its objective is to replace all proprietary codes of business entities represented in automated systems in the global financial supply chain. However, without guidance by financial institutions’ professional technology core, the project that has already set sail may not reach its promised destination... giving the industry STP, lower infrastructure costs, and reduced risk.

There have been 300,000 LEIs already issued with no official mechanism in place to access an LEI and its business card data wherever it is stored across globally disbursed LEI registries. A Central Operating Unit (COU) is to be the mechanism that creates that capability, but it is not yet in place. Transfers from the first Local Operating Unit (LOU), the US’s GMEI Utility (formerly the CICI Utility), are continuing to other LOUs. This transfer process was necessitated after a central utility concept was abandoned in favor of a virtual data base maintained in component parts in multiple sovereign jurisdictions. 

The LEI codes have initially been assigned to financial market participants involved in the newly regulated swaps markets. The LEI registries are operated by LOUs that are sponsored by regulators in multiple sovereign jurisdictions. There are 30 LOUs, with 15 already issuing LEIs. LOUs are comprised of a diverse set of facilities operators -- FMUs, data providers, business register operators, patent issuers, banks, exchanges, and sovereign standards bodies.

That a code that is to replace all other codes was issued across multiple LEI registries without a consolidating mechanism is certainly surprising in that it violates all sound systems design principles, although it was understandable when the CFTC first requested an LEI system before other regulators. That there was no standard for each of the LEI registries to define their stored business card data was likewise surprising, although one is promised shortly.

Even more surprising is that these codes have been assigned with no mechanism for maintaining them when corporate reorganizations retire or change ownership of the business entities assigned LEIs. The most surprising is that these codes are being used in live operation in an attempt to fulfill regulators’ newly designed swaps data reporting and record-keeping requirements. What is not surprising is that it is not working well.

Swaps transactions are being sent to multiple swaps data repositories (SDRs). They contain the assigned LEIs along with 60 other data elements comprising the details of the swaps transactions. These transactions are neither able to be ingested by the SDRs nor aggregated for risk analysis. Industry members are shoveling them out the door, but swaps regulators can’t use them.

The COU is to be the technical core of a federated GLEIS. The GLEIS is supposed to be organized as a virtual data base of all the separate LEI registries. The GLEIS is to conform to an "Internet-like" federation using a "network-card" within a "plug-in architecture." These design criteria had been recommended to the G20’s Financial Stability Board, the governing body of the GLEIS, and accepted as the design of the GLEIS.

The June 8 Financial Stability Board whitepaper, "A Global Legal Entity Identifier for Financial Markets," reads:

The COU will support the maintenance of a ‘logically’ centralized database of identifiers and corresponding reference data – as with the Internet, the database will appear to users to be from a single seamless system, but again as with the Internet, the data will be physically stored on different systems across the globe. Technology will deliver the logical centralization...

In particular, the FSB recommends the rapid development of the standards for LEI reference data on ownership and corporate hierarchies, as these data are essential to achieve one of the key objectives of risk aggregation for the global LEI system.

However, the mechanism of the COU is yet to be defined in any operational or technical detail. The newly installed board of the Global Legal Entity Identifier Foundation (GLEIF) has recently been chartered to implement such a mechanism. The Board members are, in the main, from the industry. A CEO has been selected, previously a technology strategist from a data vendor. Perhaps we will now get on with matching political aspirations with reality. 

The overall objective for the GLEIS is to provide an identity standard so that financial transactions that contain the LEI can be aggregated for determining risk exposure.The FSB's "Consultation Paper: Feasibility study on approaches to aggregate OTC derivatives data," of February 4, reads:

The development of global standards for derivatives data and their aggregation is a foundational requirement under any data aggregation model. Standards form the basis for the interoperability of derivatives data; they are agnostic to choice of aggregation option as they are a prerequisite for every option...

The following data elements have been identified in the Data Report as key to the aggregation process.

• Counterparty identifier
• Product identifier/product identification taxonomy
• Transaction/trade identifier

Continue on Page 2...

Allan is President and founder of financial industry joint venture development company Financial InterGroup Holdings Ltd; and strategy & acquisition consultancy Financial InterGroup Advisors. The companies are engaged in the capital, contract, currency, cash and investment ... View Full Bio
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IvySchmerken
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IvySchmerken,
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8/13/2014 | 1:04:58 PM
Low matching rates in derivatives
Allan,  Reporting of derivatives transactions in Europe has been taking place under EMIR since February. Yesterday, phase II of EMIR kicked in.  I've heard that regulators are troubled by low pairing/match rates for derivatives transactions that are being sent through multiple trade repositories. 40% of trades are matching. What do you make of this in light of the incomplete state of LEI and UTI, etc.?

 

 
allang119
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allang119,
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8/13/2014 | 1:37:37 PM
Re: Low matching rates in derivatives

In the EU under EMIR the UTI is to be composed of the LEI + an agreed to unique number. The LEIs, with no control or parent entity as part of the code have no mechanism to aggregate data by related counterparties sent to SDRs. In the US, the UTI is prohibited from being constructed with a LEI. The nearly 60 data elements that are sent to any chosen SDR (there are 23 SDRs globally) have not been standardized. The information in LEI registries (there are 30 globally) likewise have not yet been standardized. No wonder these transactions can't be matched in any one SDR. Neither can they be aggregated across SDRs for observing risk to any one business, nor its component counterparties. Sounds to me like the cart was placed before the horse.                                                

 

Greg MacSweeney
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Greg MacSweeney,
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8/13/2014 | 3:15:35 PM
Re: Low matching rates in derivatives
LEI+LOU+GLEIS+COU+FMU+CICI=CONFUSION2
Becca L
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Becca L,
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8/13/2014 | 3:21:34 PM
Re: Low matching rates in derivatives
LOL
IvySchmerken
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IvySchmerken,
User Rank: Author
8/14/2014 | 9:13:56 AM
Re: Low matching rates in derivatives
The use of so many acronyms guarantees that this is a data management/standards issue. Will business users take this problem seriously?  Do regulators understand that the data they've collected is not useful if it can't be matched at the SDR level?
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