The Financial Stability Board published a report, a week or so ago, on setting up a global legal entity identifier (LEI) system for financial markets. Although I did not see any front-page headlines on the matter, it was apparently on the agenda of the recent G20 Los Cabos summit.
The report focuses heavily on organization and funding and struggles somewhat with the role of the regulators in promoting LEIs. But the report authors believe that the system has to be based on non-profit cost recovery without monopoly rents accruing to service providers. It also talks of a short implementation period with the aim of establishing the system within 12 months.
I suspect that the process will take slightly longer, be more complicated and that the final outcome will be less altruistic than implied by this report. Undoubtedly a sound LEI structure is needed, if only to ensure that the different data repositories have both data they can use and data that can be consolidated, and that regulators, especially in a post-EMIR and Dodd-Frank world, are able to assess the mountains of information that will be available to them. From an organizational perspective, LEIs are valuable tools in assessing counterparty exposures, group-to-group activity and a host of other information requirements.
But one should not overlook the complexity of the process. The structure proposed by the FSB appears to want to reconcile demands for subsidiarity with the need for central direction. The worry is that this will be hard, if not almost impossible, to achieve. After all, attempts at central direction will create howls of anguish about regulatory extraterritoriality. And one only needs to look at ISIN versus Bloomberg or Reuters codes to appreciate the complexity of gaining agreement on standards in a competitive world.Governance, as experience shows, is both logical and emotional; we have not heard the last of that matter!
So how do we ensure technically that this initiative works? First of all we need to all understand the new standard and its impact on our IT platforms, for much debate so far has focused primarily on the technical structure of central and local LEI databases. ISO 17442, which is the approved standard, is a new 20-character alphanumeric code. That may not be easy to adopt in many platforms. Secondly, much work on the initiative is being undertaken under the SWIFT and DTCC umbrellas. A trade association group, quite dominated by the U.S. based SIFMA organization, has taken a leadership role in the debate. ANNA, the national numbering association, is also involved. There are gaps, especially among commercial information vendors and some geographies, and they need to be embraced to avoid alternative systems being developed and exception processing becoming a meaningful norm.Thirdly, there will be undoubted tensions on the location of the database. Unfortunately, the pain of the Dodd-Frank-EMIR overlap or the problematic aspects of FATCA for global firms means the U.S. is hardly anyones country of choice for such a database. But the U.S. is the powerhouse of financial markets with the most complex (structurally) financial entities. Even though the database will not handle transactional data, the reality is that merely reduces rather than overcomes concerns from many key centers.
I cannot see 2013 as a realistic target date for real implementation. Indeed, I suspect that there could be many delays as the debate moves hopefully from the aficionados of the standards world to the desks of the businesspeople. And one of my key worries is the risk, as this is part of the G20 program, that the initiative becomes mandatory in many jurisdictions before it is fully baked!