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Data Management

11:04 AM
Allan Grody
Allan Grody
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The Second Coming of the Reference Data Utility

Five years after the financial crisis, the Global Legal Entity Identification System initiative, has renewed interest in solving the reference data issue, long preventing efficiency in the financial supply chain.

One of the longest standing and intractable impediments to global straight-through-processing in the financial services industry has been the proprietary and non-standard nature of reference data. Reference data is the metadata that defines what counterparty and what contract or instrument the monetary values associated with each position and cash flow pertains to. As a completely electronic product, reference data can be thought of as the packaging that identifies and transports financial transactions.

Allan Grody, Financial InterGroup
Allan Grody, Financial InterGroup

Regulators were reawakened to the significance of reference data while rummaging through the collapsed ‘basement’ of Lehman Brothers. They were attempting to determine the financial transactions of Lehman, what its financial exposures were, and who had been put at risk by Lehman’s bankruptcy. Many and varied computer codes were found to be describing the same business entity. There were no universal codes to define Lehman the parent or its thousands of legal entities, nor its counterparties, nor the products it traded in. It is now a regulatory priority to fix this ‘plumbing’.

Since the financial crisis regulators came to realize they too needed such financial entity and financial product ‘catalogues’ (the names the Dodd-Frank legislation uses for these data bases that are required to be maintained by the US Treasury’s new Office of Financial Research). A ‘business entity’ catalogue, too contentious at the time to be included in the legislation as financial market participants are reluctant to share ownership information, was left out of the legislation to be developed later as a private sector initiative in cooperation with global regulators. The Global Legal Entity Identification (LEI) System (GLEIS) is the outcome of that cooperation.

The GLEIS initiative has spawned a renewed interest in solving the reference data issue, long preventing efficiency in the financial supply chain. At least four reference data utility initiatives are underway, two by infrastructure operators, Euroclear and DTCC, another by Data Vendors Bloomberg and Markit, and the one by our firm known as the Central Counterparty for Data Management (CCDM).

The renewed interest has been spawned by an approach made simpler now that there is a global institution, the G20’s Financial Stability Board directing infrastructure projects through member states’ regulatory institutions. The first such project, the GLEIS will provide a unique identifier and ‘business card’ reference data for counterparties and other financial market participants in the swaps supply chain. Thereafter, all financial market participants that can enter into financial contracts for any financial product are to register for a LEI.

Beyond the initial implementation of labeling of legal entities in the swaps markets, the codes would also have to be useful for data aggregation and systemic risk. Here multiple codes pertaining to a single business entity (i.e. an ultimate parent or ultimate controlling entity) would need to be rolled up. It is yet to be demonstrated that this is doable within real-time time tolerances given that each LEI as of now has been assigned a randomly generated code with no way of associating one to another without creating huge mapping tables.

Technically, the GLEIS is to be a federated intelligent network, federating multiple LEI registries domiciled in the sovereign domain of each participating country. The technical description of the FSB’s recommended system is a “virtual” database, operating across a federated network with a “network card” and a “plug-in” architecture design.

The CCDM is the only global reference data utility designed to utilize the federated network of the GLEIS. The design embeds existing proprietary business entity code maps into the networks servers and routers to permit in-network code mapping to and from the LEI identifier code. However, the LEI code itself in its current “interim” form, the term used is the “pre-LEI” by the FSB and now its successor, the Regulatory Oversight Committee, will not be usable without introducing another layer of mapping – firms have 100’s, 1000’s, some over 10,000 legal entities.

To solve this problem we have proposed the U3 (unique, universal and unambiguous) Identification coding system so that the LEI can be transitioned to a more efficient code construction for data aggregation and internal use. It is also extensible for use as the unique product identifier (the FSB required UPI) and a yet to be required unique corporate event identification code to maintain both the LEI and UPI.

The Central Counterparty for Data Management (CCDM) would match multiple incoming sources of referential data, “clear” this data through best-of-breed computer analysis, and “settle” (distribute) industry accepted/regulatory mandated datasets by assigning them to globally mandated LEI and UPI standard identifiers. This would entail an industry-wide effort not dissimilar to the clearing entities, netting systems and central depositories that emerged as industry-wide, but sovereign country specific solutions to past industry-wide problems. Today’s solution, however, must be global not local.

Leading this effort could well be the largest of financial enterprises, Systemically Important Financial Institutions (SIFIs) that now truly define a global financial industry. These SIFIs are in need of satisfying their own collective interests in cost efficiencies and uniform regulatory reporting as they currently absorb the most cost and risk and, are required to set aside operational risk capital under new capital guidelines (Basel III). There maturity as data savvy innovators has been given impetus by the one ingredient missing from all prior attempts at creating a reference data utility, regulatory compulsion.

—Allan D. Grody is President of Financial Intergroup Holdings Ltd; Chairman of the Advisory Board of the Financial Industry Ontology, Risk and Data consortium; an advisor to the Regulatory Oversight Committee of the Financial Stability Board and to the FSB.

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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