The United States has taken a big step toward a standardized system to clearly identify counterparties. So-called legal entity identifiers, or LEIs, aren’t here quite yet, but their forerunners are, and equity traders should take note, as the new IDs could help firms better analyze risk and ultimately make more money.
Last week, regulators announced that the Depository Trust & Clearing Corp. and Swift will form a joint venture to provide unique IDs for swap dealers. That organization is now laying the groundwork for a full-fledged LEI system, which could change the way everything-from equities to options to foreign exchange-will trade in the future.
Tim Lind, head of legal entity and corporate actions at Thomson Reuters, said the only current rules requiring LEIs are for swap disclosures, but the IDs will soon be used for all financial transactions. And the impetus for that change is coming as much from the industry itself as from regulators.
"I’ve never had a conversation with customers, anyone in the market, who said this was a dumb idea," Lind said.
To understand the value of LEIs, Lind pointed to Citi. The firm has more than 4,000 different entities under the Citi umbrella, but regardless of which of those entities is on the other side of a trade, the counterparty is still Citi. When firms do their risk analysis, however, it isn’t clear that many of their different trades are actually all with the same firm.
"Understanding whom you’re doing business with is a real critical piece for every bank, every trader," he said. "The more you know your counterparty, the better your risk management process is."
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