The FSB pulls the registration authority from the proposed LEI standard and compels SWIFT to consider an alternative role.
In an eleventh hour move, a key panel of the Financial Stability Board (FSB) is pushing for the removal of the registration authority from the proposed standard for legal entity identifiers (LEIs). This leaves the SWIFT financial messaging cooperative, a backer of the LEI effort, without a clear role. Undaunted, SWIFT says it’s a strong candidate to serve as the central utility for the federated governance that the FSB prefers.
A draft report of the FSB’s LEI Expert group, now under review by all FSB members, is urging the ISO standards body to adopt a federated governance approach for the initiative to uniquely identify financial counterparties according to the proposed LEI standard (ISO 17442). To aid its global acceptance, the FSB will deliver final recommendations at the G-20 summit in Los Cabos, Mexico, on June 18 and19.
“We cannot provide any comments on the report and recommendations,” says a spokesperson for the FSB.
However, the FSB has been talking to SWIFT as well as the ISO about this issue, says Paul
Paul Janssens,
LEI program director,
SWIFT
Janssens, LEI Program Director, Securities and Treasury Markets, for SWIFT. “So, yes, from that perspective, I can say that we’ve been officially notified,” Janssens says. “What we can consider as probably more official is the ISO process, which has now started.”
The ISO has been circulating by ballot the revised version of the LEI standard to the ISO membership for their consideration. Given the ISO’s actions, “we can consider that this is really official,” Janssens says.
Officials at ISO did not respond to requests for comment.
The FSB expert committee’s proposed changes will not shut out SWIFT, Janssens says. “In fact, it’s not SWIFT that is being put of the picture, it’s the fact there is no registration authority in the ISO standard, which is the real change. The tasks will have to be performed whether you call it a registration authority under ISO terminology or a central utility operations agent under the FSB governance; the functions are still the same.”
Industry observers say the FSB’s move is not anti-SWIFT but a streamlining of the governance structure.
Virginie O’Shea,
analyst,
Aite Group
“The FSB wasn’t keen on having so many moving parts as far as I can tell from having conversations with a few people,” says Virginie O’Shea, a data management and post-trade technology analyst with market researcher Aite Group.
“I guess it puts SWIFT in a difficult position because they’ve been working with the DTCC and they’ve invested a lot of money behind the scenes,” O’Shea says. “Essentially, they’ve now been left without an official role in the project.”
However, it is mistaken to write off SWIFT from the LEI effort, says Gary Wright, the CEO of London-based B.I.S.S. Research. The change allows SWIFT to focus more on immediate customers and to hasten implementation, Wright says. “So it’s diminished in range of products and depth globally but still retains them where they sit now. I think this is good news for all, including SWIFT.”
The FSB’s overall concern is that “any single entity would have conflicts and it could hinder take-up globally and throughout the industry,” Wright says. “Some people might worry about the commercial issue but I don’t think that’s really an issue as whatever the governance structure, it will presumably have some form of pricing.”
“If you speak to any buy-side firms, they don’t really know what the LEI is or what it’s targeted at. They certainly haven’t done any preparation for it.”
—Virginie O’Shea, Aite Group analyst
The removal of the registration authority may actually hasten the “lift-off” for the LEI standards
Gary Wright, CEO,B.I.S.S. Research
effort, Wright says. “SWIFT is a collegiate organization with umpteen committees and, as we all know, change within SWIFT can be frustratingly slow. … This decision should make it clearer for SWIFT and the market,” he says.
Hot Deadlines
The change will not stall the overall LEI initiative especially as “we’re getting very close to some hot deadlines,” Janssens says. “The ISO balloting will close on the 27th of May. The FSB will have a plenary on May 28th after which the CFTC (U.S. Commodity Futures Trading Commission) will make its recommendations on May 29th about who will be the provider for the interim solution. It all fits perfectly in place.” The CFTC has mandated the use of LEIs for its swap data recordkeeping and reporting requirements, starting July 16, 2012.
SWIFT’s future role in the LEI initiative will or will not fall into place after the FSB announces all of its recommendations.
“The role that was seen for Swift as the registration authority … still will have to be performed,” Janssens says. “We are still prepared to play that role.”
In fact, the potential new role is not very different from that of the registration authority, Janssens says. “Our role was going to receive the requests after validation and scrubbing by our partner, the DTCC,” he says. The alternative role would require SWIFT to receive and process requests, generate the LEI number and allocate it to the requester, store the number in a directory, and then deliver it to the firm making the request. “We then make the whole information public globally.”
The eventual, federated system to come is likely to have an implementation phase that will feature a central function and federated bodies, Janssens says.
“So on Day One, there will be a central function with a central portal where a buy-side firm, a large corporate or a broker/dealer needs an LEI and can come to the web portal,” Janssens says. They will supply the required information in order for the LEI to be issued. That will be the simple part of the initial phase.
“Later on, as an example, a country like China or Brazil where there could be strong national business registries like the Secretary of State in the US … would be federated registrars,” Janssens says. These national registrars will receive the requests and will validate the information against national sources and will submit the relevant information via an operational means yet to be defined to a central, international body that will issue and allocate LEI numbers. “I would see our role for the moment as part of this central function,” he says. “We are a truly international organization so I think we can play a role there.”
Pitfalls Ahead?
While the standards-building process has been fast paced, there could be pitfalls ahead for the eventual LEI standard, O’Shea says. In particular, there have been concerns about the details of the current proposal, she says. “Largely, it’s because of the length of it—there are 20 characters and there might be some issues with regards to that internally at some financial institutions.”
In addition, the buy side, C-level executives and parts of the global trading community need to get on board with the effort.
“The role that was seen for Swift as the registration authority … still will have to be performed. We are still prepared to play that role.”
—Paul Janssens, LEI Program Director, SWIFT
“If the industry isn’t really ready and the regulators haven’t been particularly good at communicating what’s required, you can see the whole knock-on effect across the board,” O’Shea says. Bold moves such as including LEI support with the
Mifid II reforms and other major regulatory overhauls across the globe would better focus the industry’s attention and spur more planning for the IT overhauls that the LEI standard will ultimately require.
“If you speak to any buy-side firms, they don’t really know what the LEI is or what it’s targeted at. They certainly haven’t done any preparation for it,” O’Shea says. “If you get fines for noncompliance, people will stick up and pay attention.”
The global reach of the LEI initiative may also need work, O’Shea says. While the Hong Kong Monetary Authority (HKMA), the Canadian Securities Administrators (CSA) and the Australian Securities & Investment Commission (ASIC) have committed to using the LEI standard, other countries such as the United Kingdom have not shown as much enthusiasm. This could result in partial implementation of the standard internationally.
If the LEI push does stall out over the coming months, it will impact the IT budgeting decisions at many financial service firms. “Once things start sliding, you don’t get the budget for them,” O’Shea says. “The hope isn’t dead yet. But it could be.”
Previous LEI efforts foundered because industry players failed to reach agreement on a standard and, ironically, there was no registration authority because SWIFT declined to take on the role, O’Shea says. “Now, SWIFT was willing to do it and they’ve been taken out of the equation. What happens then? You’re relying on individual jurisdictions.”
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