LEIs, A Regulatory Darling, Leave Firms In Search of Accuracy

Legal entity identifiers (LEI) are the modern-day bar code for companies trading in the financial markets. Globally recognized, the identification convention is increasingly playing a role in waves of legislation and reporting standards, prompting firms to exercise diligence in keeping records up to date.

It's more difficult than it sounds. About 15-20 percent of company records go through a significant change in reference data, explains Mark Davies, general manager and head at Avox, a LEI content feed supplier serving more than 40 large financial service firms. These include changes to ownership, company name, physical address, down to liquidation and bankruptcy. For reporting purposes and tracking internal risk (e.g. jurisdiction, business classification), these changes can have a real impact.

Timely Challenges

Avox's customers care about anywhere from 5,000 to 500,000 legal entities. With this significant portion of the database going though substantial change firms don't often know where to confidently look for information in a timely manner. "It's the opposite of the big data issue," he says. "Rather than analysing high volumes of unstructured data for information, IT'S ABOUT questioning if the information you can access can be trusted to make the decisions you need to run the business."

Traditionally, firms had managed this change in a reactive way through updates by relationship managers (word-of mouth) and offshore functions to manage the reference data. "Unfortunately, at this scale, the expertise doesn't really exist in many organizations," and neither do the resources, says Davies.

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He explains internally leveraging source data has its benefits but also its limits in a global market, especially when it comes to language barriers. A UK business may know about and use sources written in English to keep track of the mergers and ownership changes in their territory, but can they keep up with changes in Asia? Japanese entities struggle with the English language sources, and so on.

In addition to proactive research and monitoring filing and feeds, Avox keeps their information feeds to-date using a model that takes in feeds from clients on a regular basis to form a collaborative pool of data. If one of the firms identifies a change to a record it's treated as a challenge to existing data causing Avox's researchers to independently investigate. If the change is found to be true, it is updated in the central records. Davies says that in 11 years they have found this to be the most trusted way of updating the database, often days or weeks ahead of official registry updates.

LEIs in Regulations

Avox is finding there is an increasing focus on using reference data for complying with regulations. In the US the CFTC has issued LEI standards around derivatives in Dodd Frank reporting rules. Under EMIR reporting for every derivative trade in the EU requires identification of trade counterparts, including type of organization using 1 of 7 classifications. Davies believes there is widespread inconsistencies of a classification between one reporting company and another.

"FATCA is equally important for all global financial service firms during the next few year," he adds. This regulation relates to the reporting of tax interests for US persons to the IRS. Firms are required to report various aspects relating to their clients including jurisdiction information, detailed ownership and the types of organization. "To answer each of these questions every firm that reports needs a good understanding of their clients, and sourcing from scratch is a big task. Maintaining that data over time is an even bigger problem."

Many firms are reporting ten's of thousands of trades on daily basis, leaving plenty of room for error, but at this stage it's unclear what the consequences of poor data quality" observes Davies. "It is fair to assume as global regulators get used to the scale and content of what is being reported more, there will be an increasing focus on the detail within the information they are capturing."

This data is also valuable for tracking internal risk, an issue best exemplified by the Lehman crisis. At the time, identifying all the legal entities in the company group was a complex problem for firms. It took weeks for some sell-side organizations to confidently identify all relevant global transactions. The ongoing accuracy of this data can have a substantial bearing on internal credit lines and the application of trading limits so it gets right to the heart of any organisations Risk appetite.

"There always has been a demand for this information," says Davies. "Regulations are putting this into sharper focus but equally risk management is still an important driver for our customers. Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio