The push for a Legal Entity Identifier (LEI) standard has just taken two giant steps forward. It has the approval of the Financial Stability Board (FSB) and ISO has just published the blueprint in the form of the ISO 17442 standard. While these are remarkable achievements, there is a potential pitfall ahead in getting the world to implement a system to uniquely identify financial counterparties, and thus erase the confusion caused by multiple ways of identifying them.
To recap, the FSB, which held its plenary session in Hong Kong this week, approved recommendations for a global LEI system, and will pass them onto the attendees of the Group of Twenty (G-20) summit, who will gather in Los Cabos, Mexico, on June 18-19. (The G20 members represent about 90% of global GDP and 80% of international trade.) The FSB in coordination with the International Organization for Standardization (ISO) anticipates a global LEI system by March 2013.
But, one of the biggest unresolved issues is exactly how the decentralized LEI registration process will work.
A key recommendation of the FSB, which was widely reported earlier this month, is that rather than use a central authority such as the SWIFT financial messaging and services cooperative, the FSB prefers registration to be left to incumbent national jurisdictions such as the Association of National Numbering Agencies (ANNA) in the US. (This move complicates but does not eliminate SWIFT’s role in the LEI push.) Decentralization could help or could hinder the acceptance of the LEI standard.
As industry observers have noted, it might hasten acceptance because the incumbent national bodies can move much faster than SWIFT. Or they could be bottlenecks especially in nations that have not shown any interest in a global standard for LEIs. In addition, many buy-side firms have yet to seriously consider the LEI issue and have decided to let their sell-side counterparties sort it out, which could also undercut universal support.
All of this has activated my pessimism and I can foresee a worst-case scenario where high-level groups such as ISO, the FSB and the G-20 (which helped form the FSB) create a standard that cannot be fully implemented because it hasn’t been accepted by all or mostly all of the nations involved in global securities trading. The key for success is to get universal support for the LEI standard and that probably requires some kind of enforcement, which has not yet been part of the discussion.
So, we will see if there are some surprises at the G-20 summit or if G-20 members rubber stamp the FSB’s recommendations and leave the enforcement issue to others.
In the meantime, you can check out the newly minted ISO 17442 standard, which consists of a 20-character alphanumeric code and elements for reference data attributes.
“LEIs can be assigned to a legal person or structure that is organized under corporate laws of any jurisdiction,” according to a prepared statement from James Whittle, Convenor of ISO/TC 68 working group WG 6, which is responsible for the LEI standard. “These entities include, but are not limited to, all financial intermediaries, banks and finance companies, all entities listed on an exchange, all entities that trade stock or debt, partnerships and pension funds, all entities under the purview of a financial regulator and their holding companies and supranationals.”
ISO also says the standards effort includes:
- An open governance of the issuance and maintenance of the LEI scheme
- No embedded intelligence
- A way to leverage the ISO/TC 68 in defining and maintaining identifier standards
- And support for defining a scheme that is “scalable and free from assignment limitations.”
ISO 17442 is available from ISO national member institutes. It can also be purchased from the ISO Central Secretariat for a price of 50 Swiss francs, via the ISO Store or by contacting ISO’s Marketing, Communication and Information department.
Despite the possible stumbling blocks, it might be wise to know the details of the standard as it’s an idea whose time has come.
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