08:05 AM
Allan Grody
Allan Grody
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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 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.

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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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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?
Becca L
Becca L,
User Rank: Author
8/13/2014 | 3:21:34 PM
Re: Low matching rates in derivatives
Greg MacSweeney
Greg MacSweeney,
User Rank: Author
8/13/2014 | 3:15:35 PM
Re: Low matching rates in derivatives
User Rank: Author
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.                                                


User Rank: Author
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.?


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