LEI, Bit by Bit� & the Missing Bits
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 [email protected].
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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