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Allan Grody
Allan Grody
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LEI, Bit by Bitů & the Missing Bits

Here's everything you need to know about LEIs, what they are, how they work, and what's around the corner.

What is an LEI: Legal entity identifier, a universal and unique computer readable code planned for identifying every financial market participant in the financial supply chain.

What is the GLEIS: The Global LEI System, a planned Internet-like network of LEI registries that register, maintain, and provide lookup and download capability for the LEI.

Who controls the GLEIS: The Financial Stability Board, a global standard-setting body created by the G20.

What is a LOU: Local operating unit, a facilities operator sponsored by a financial regulator to assign LEIs and operate a LEI registry containing business card data of financial market participants.

How is a LEI constructed:

Positions

1-4     A four character prefix allocated uniquely to each LOU.

5-6     Two reserved characters set to zero.

7-18   Entity-specific part of the code generated and assigned by LOUs according to transparent, sound and robust allocation policies.

19-20 Two check digits as described in the ISO 17442 LEI standard

How is a LEI registered: The financial market participant must provide its official name, address, headquarters, legal form, and business register identity code. In turn, a LOU provides a LEI code and maintains the LEI registry.

What is the overall objective for the LEI: Replacing all proprietary business codes for financial market participants, so that regulators can observe the contagion of systemic risk building up across the globe.

What are the immediate benefits expected for the LEI: Swaps counterparty data aggregation for risk exposure analysis.

What are the longer-term benefits of using the LEI: Mapping tables eliminated; straight-thru-processing enabled; improved efficiency in enterprise risk management; enabling systemic risk analysis across financial institutions; lowering firm and industry infrastructure costs.

What remains to be done with the LEI: Developing standard data tags for each data element of the LEI registers; associating an ultimate parent/control entity with each LEI; associating each LEI's ownership or control relationship and percentage ownership according to standard account consolidation rules; linking up the GLEIS to corporate events that change the LEI such as mergers, acquisitions, spinoffs, etc.; expanding business card data to include reference data that operationalizes the LEI for use in business applications by industry and regulators.

What is the current state of implementation of the LEI: In the rush to declare safe passage from the financial crisis, an interim GLEIS has been set up with pre-LEIs being issued by pre-LOUs. These pre-LEIs are being used in swaps transactions being sent to newly mandated infrastructure entities called swaps data repositories (SDRs). This is the first use of the LEI, even though partial implementations, incomplete understandings of business practice, and poorly designed solutions are apparent. Neither the EU's regulators nor the US CFTC can ingest, process, maintain, or aggregate the data.

What comes next after the LEI: Missing to this point is the global identifiers for the instruments and contracts traded in (unique product identifier -- UPI), and an audit trail tying transactions together throughout their life-cycle (the unique transaction identifier -- UTI). No amount of automation would be effective for either risk management or trade processing on a global scale without completing the overall global identification scheme for financial market participants and the contracts and instruments they trade… and providing the linkage between the two.

Author's note: In the spirit of this being, at its root, the implementation of a global technology solution for implementing a global capability to assess systemic risk across all parties and all trades, it is best to refer to this first use as a "beta" version, not yet industrial strength. It awaits redefinition and a revised next version for use in reporting and recording swaps transactions as a first next step of the test of the efficacy of the GLEIS's design.

Editor's note: The full report "In the Weeds on the Global LEI Implementation" is available from Financial InterGroup by contacting agrody@FinancialinterGroup.com.

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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6/29/2014 | 12:23:57 PM
Regulators and swap LEIs
Allan, thank you for this "bit by bit" roadmap of the LEI process. You note that pre-LEIs are being used in swaps transactions being sent to newly mandated infrastructure entities called swaps data repositories (SDRs). You also indicate that US and oversesas regulators are having trouble ingesting and  processing these pre-LEIs.

Why are regulators challenged by this data when they are the ones requesting it to track counterparty risk and create an audit trail of transactions? What lessons can be learned from this experiment?

 
allang119
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allang119,
User Rank: Author
6/29/2014 | 4:59:26 PM
Re: Regulators and swap LEIs
Ivy you ask why regulators are challenged to use the data that they requested?

In my view regulators have an imprecise, sovereign country oriented understanding of market practices and operational processes even though they are attempting to solve global problems. Why is that? Because they rely on industry 'experts' to tell them what global practices are. However, this was the first time regulators were to embrace global practices in a global solution to a global problem (the first attempt to define a universal coding system and design a new global market infrastructure for swaps).  The 'industry' is mired in legacy thinking, best practices of another era, and a Rube Goldberg infrastructure that evolved from supporting revenue producing  front-ends when the plumbing need to be fixed first. The industry did not know enough to be of counsel to regulators, nor admit it, either to itself or its regulators.  Regulators listened, asked for comments to their consultative papers, held roundtables, then put in place regulations. They did not study independently and in-depth the solutions, as one would expect when building first time ever complex information systems. The result is an incomplete and, to this point, dysfunctional solution. 

Your next question, what lessons can be learned from this experiment has many answers, but the one that stands out in my mind is the need for the CEOs of the global financial institutions (now called Global SIFIs – Systemically Important Financial Institutions) to organize their own Financial Stability Board as the G20 heads of state had done for regulators. Then the ultimate decisions makers in both camps can be held responsible for reengineering the financial system. They will at least pay attention to what is too easily dismissed as just 'plumbing'. To your readers it is well understood as essential for smoothly functioning automated business applications embedded in software operating within interconnected computers across global communications networks, all of which we call the global financial system.    

 To summarize, others more notable than I have said it better than I ever could 

"We cannot solve our problems with the same thinking we used when we created them."

Albert Einstein

"The difficulty lays not so much in developing new ideas as in escaping old ones"

John Maynard Keynes

IvySchmerken
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IvySchmerken,
User Rank: Author
6/30/2014 | 10:59:28 PM
Re: Regulators and swap LEIs
Allan, 

The Global Legal Entity Identifier Foundation (GLEIF) held an inaugural meeting of the foundation Board in Zurich, Switzerland, on 26 June 2014. I received a press release (Monday) about this development.

The purpose of the GLEIF is to serve the broad public interest as the operational arm of the GLEIS [Global LEI System], supporting on a not-­‐for-­‐profit basis the implementation and use of a global Legal Entity Identifier (LEI) and associated data on legally distinct entities that engage in financial transactions.

According to the press releae: "The foundation will be the heart of the LEI system, building its technology infrastructure and ensuring adherence to governing principles and standards, including reliability, quality, and uniqueness."

Any thoughts?

 

 

 
allang119
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allang119,
User Rank: Author
6/30/2014 | 11:22:46 PM
Re: Regulators and swap LEIs

Yes, this is a milestone – I am very supportive that the ROC has transferred the responsibility to the GLEIF, principally an industry body supported by a few academics. I would, however,  characterize it more as  a Hail Mary pass  by the ROC to the GLEIF with an admonishment to the down field receivers not to fail to catch it and bring it over the goal line. Now the burden (and opportunity) is on the GLEIF.

 

The expectation for the industry was  for a business identifier to replace all identifiers, that was how the Dodd-Frank 'sales pitch' was made, and later the same was made to the FSB. The GLEIF also has that intent, that is not to make it 'just another code' to add to all the other ones, this one for swaps. I hope the industry/regulator combination now in place through the ROC/GLEIF will begin to deal with the many issues left unresolved and that is so important to make this all work.

 

Recall the goal is data aggregation of financial transactions that have the LEI embedded in it, not just labelling a legal entity with a unique code. The LEI code in its present configuration has no connection to a controlling entity that would be where the aggregated risk of the counterparties that make up that business entity is concentrated. A lot more work to be done

 

 

allang119
50%
50%
allang119,
User Rank: Author
6/30/2014 | 11:23:00 PM
Re: Regulators and swap LEIs

Yes, this is a milestone – I am very supportive that the ROC has transferred the responsibility to the GLEIF, principally an industry body supported by a few academics. I would, however,  characterize it more as  a Hail Mary pass  by the ROC to the GLEIF with an admonishment to the down field receivers not to fail to catch it and bring it over the goal line. Now the burden (and opportunity) is on the GLEIF.

 

The expectation for the industry was  for a business identifier to replace all identifiers, that was how the Dodd-Frank 'sales pitch' was made, and later the same was made to the FSB. The GLEIF also has that intent, that is not to make it 'just another code' to add to all the other ones, this one for swaps. I hope the industry/regulator combination now in place through the ROC/GLEIF will begin to deal with the many issues left unresolved and that is so important to make this all work.

 

Recall the goal is data aggregation of financial transactions that have the LEI embedded in it, not just labelling a legal entity with a unique code. The LEI code in its present configuration has no connection to a controlling entity that would be where the aggregated risk of the counterparties that make up that business entity is concentrated. A lot more work to be done

 

 

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