The ISO 17442:2012 code construction standard for the LEI is not very useful for aggregating transaction data. To see why, let’s examine the code construction. It consists of 18 alphanumeric characters and two numeric check digits calculated from the previous 18 characters. This standard has been further defined by the FSB as follows:
The Current ISO 17442:2012 LEI code as modified by the FSB
- Characters 1-4: A four character prefix allocated uniquely to each LOU.
- Characters 5-6: Two reserved characters set to zero.
- Characters 7-18: Entity-specific part of the code generated and assigned by LOUs according to transparent, sound and robust allocation policies.
- Characters 19-20: Two check digits as described in the ISO 17442 standards.
There is no mechanism to tie the LEIs of the same business entity together, only to its LOU. And that is only at initiation of the LEI. Since the LEI can be ported to another LOU, the identity of the LOU changes even though the LOU code does not, as it is an integral part of the LEI code.
An alternate code construction has been proposed, staying within the current ISO/FSB LEI standard but capable of aggregating data directly from the code.
Aggregation Capable ISO/FSB 17442:2012 Compliant LEI
Characters 1 – 4 + 5 - 6 |7-----------------------------------18] +19-20
1 The prefix is currently assigned by the FSB and consists of 4 numeric digits. It is randomly chosen from a sequence of 10,000 numbers. Its purpose is to make all the entity specific codes assigned by each LOU globally unique when combined with the prefix and the expansion area, now set to 00.
2 Expansion digits, purpose not publically defined other than for expansion of code consisting of two zeroes (00)
3 Registration Domain (Registration Identifier - RID) consisting of six numeric digits randomly chosen and assigned as is the LOU prefix in note 1, but not by the FSB, by the COU. Its purpose is to make all the entity specific codes registered by each financial market participant globally unique.
4 Sequence code consisting of five characters assigned by the financial market participant (the Registrant)
5 Re-sequencing code used for re-sequencing of code hierarchy for corporate events that change the ownership of the LEI code
6 Check digits calculated as described in LEI ISO 17442:2012 standard
Further, if we would dispense with the prefix for the LOU completely as part of the code (it serves no purpose other than to preserve uniqueness of LEIs generated in separate venues) then we believe we would have an even better way of aggregating data from the code itself. The first characters 1-4 would be the Registrants’ unique code, and characters 7-18 could be adapted from the corresponding internal codes of the Registrant’s legal entities present in internal systems. Alternatively we can adapt a simple sequencing scheme for each LEI.
With the COU functions soon to be designed it is reasonable to think about conducting a proof of concept for redesigning the code for future use. The Registrant ID’s can be assigned by the COU as the LOU’s prefix is now, as a unique code randomly chosen. This Registrant prefix can then be used by Registrant’s designated core LEI issuer, whether an internal department or outsourced to a third party.
Combing the randomly chosen RID with a registrant’s own remaining portion of the code (the entity specific part, Characters 7-18) at the time each LEI is registered preserves uniqueness and non-intelligence. It also preserves synchronization between the internal codes and the external LEIs. This is particularly important to the larger financial institutions that have hundreds, if not thousands, of potential LEIs to be registered.
Getting the LEI right is important, not only for knowing the counterparties and what controlling interests they roll–up to, but because they are also used in constructing Unique Transaction Identifiers (UTIs) in the EU (the LEI is not allowed to be used in the construction of the UTI in the US) that are essential to matching component parts of a swaps transaction.
With the first “beta” test of the use of the LEI in the swaps reporting regime producing GIGO (garbage in, garbage out) results, isn’t it better to reassess, regroup, and then set sail to the far shores of our promised destination... in a better boat.
Obtain Financial InterGroup’s latest client research at: https://www.fig-uk.com/products.php.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