In an effort to combat counterparty risk, there is a major push to give financial institutions global ID numbers. Regulators, brokerage firms and banks are calling for a standardized way to recognize who is really involved in a transaction, regardless of where in the world a trade takes place.
Though the details of the system have not yet been determined, the government envisions the establishment of so-called legal entity identifiers, or LEIs, which would function a bit like an individual’s social security number, verifying a financial institution’s identity. That way both sides of a trade, whether of equities, options, derivatives or something else, can be fully transparent.
In the wake of Lehman Brothers’ collapse, having a single LEI system that is standardized internationally would allow both firms and regulators to better assess counterparty and systemic risk. Because the LEI concept enjoys such broad support, a system could be unveiled sometime this year, experts say.
The Department of Treasury’s new Office of Financial Research, which was created by Dodd-Frank, is supposed to set up a global LEI system, but according to speakers at last week’s SIFMA Financial Services Technology Leaders Forum, the drive to get the job done isn’t just coming from the government.
Richard Berner, counselor to Treasury Secretary Timothy Geithner, said the financial crisis has made it clear that a patchwork of different national requirements is inadequate, and both regulators and industry leaders are reaching across borders to establish new identifiers.
“It is important that we collaborate to create global research,” Berner said. “More effective data, more transparent data, will be more useful to the industry and to the public at large.”
Berner promised the government would make sure the new LEI system provides reliable data while reducing the compliance burden on the industry. He said Treasury would do this by partnering with firms that already have existing models for tracking data on counterparties.
A single LEI system will create a connective tissue for the markets, Berner said. Once it is in place, industry should be able to reap substantial savings from the use of a single identifier, he added.
Industry leaders on a panel at the SIFMA conference agreed. They said much of the leadership on LEI is coming from within industry, not from government.
Robin Doyle, senior vice president and chief financial officer for corporate risk at JPMorgan Chase, said people in the industry have realized that having data coming in from multiple sources without clear identifiers makes risk management problematic.
“In order to be able to manage risk well, you need to be able to aggregate data well,” Doyle said.
A global LEI system would provide reliable data so not just regulators, but also corporations, would be able to better measure and deal with risk, according to Doyle.
There will be some start-up costs associated with the adoption of LEI, said Daniel Maury, global lead for the enterprise client data program at UBS, but he said the system has become a necessity.
“The real question is how much will it cost by not doing it,” Maury said, alluding to the current invisible cost of data correction tasks performed by risk control and finance teams. “This is an issue that all broker-dealers are experiencing or have experienced at a point in time.”
Lucille Mayer, managing director of technology products and services for Pershing LLC, agreed that it’s time to take on LEI. The industry has already focused on the issue, and it is actively working with governments to make sure the final system works for everybody, she said.
“Many of our firms over the years have built our own internal legal entity identifiers,” Mayer said. “The development of the model for an LEI has been a collaborative effort.”
Also speaking on the panel was John Bottega, chief data officer for the markets group at the Federal Reserve Bank of New York. He said the collaboration between the private and public sectors on the issue has been phenomenal.
Bottega has been meeting with other regulators around the world to hammer out an international consensus. While some countries are closer to adopting LEI than others, virtually everyone agrees that something should be done, according to Bottega.
“We experienced in the financial crisis that this is not a U.S. issue,” he said. “This is a global issue.”
