Firms are readying infrastructures to take advantage of the global push to uniquely identify financial counterparties and looking to the reference data overhaul to come.

The initiative to uniquely identify financial counterparties according to the proposed Legal Entity Identifier (LEI) standard (ISO 17442) is hitting its stride as many key milestones are looming and as financial services firms refine plans and budgets for the reference data overhaul mandated by regulators.

In the US, regulators have compelled the industry to create a new transparency via an entity identifier that is consistent and accurate. For the moment, this effort has grown by leaps and bounds compared to prior pushes that fell flat.

“Why did it take so long and why did it need a crisis?” Paul Janssens, LEI program director for SWIFT, echoes a reporter’s question. “In many firms, up until 2008, data was scattered through different organizations within the firms by business lines, geographies or historic legacy systems due to mergers and acquisitions.”

But the Great Recession caused by derivatives rotting on the vine made it clear why it was dangerous to continue with multiple views of the entities involved.

“All the efforts before never came to a conclusion because the business case was not really there,” Janssens says. “If you need to change a certain number of things, you need to have a business case to kick off a project in any given organization. What changed after the crisis is the regulatory mandate. So, what I would say is that the carrot didn’t work but the stick does.”

Bodies in Motion

The stick appears to be jolting many key organizations into action.

Earlier this month, the Global Financial Markets Association (GFMA) provided a download of an LEI test file created via the Depository Trust and Clearing Corp. (DTCC) and the SWIFT cooperative for financial messaging and related services.

The GFMA serves as a forum for the Association for Financial Markets in Europe (AFME) in London and Brussels, the Asia Securities Industry & Financial Markets Association (ASIFMA) in Hong Kong and the Securities Industry and Financial Markets Association (SIFMA) in New York and Washington. The test file is available to AFME, ASIFMA and SIFMA members and the general public.

The test file, which has randomly selected records from market participants, is provisional LEI patterned after the proposed ISO 17442 LEI Standard with core data attributes that conform to the ISO draft. The test file is intended to help firms prepare for the regulatory mandates in their own countries and the mandates to come from the Group of Twenty (G-20) leaders for more global transparency into entity reference data.

The G-20 last year mandated that the Financial Stability Board (FSB), which coordinates from Basel, Switzerland the efforts of national and international standards-setting bodies for the financial sector, guide the international standards community in building a consensus on:

The governance and oversight model for a global LEI standard that includes the needs of regulators, financial services firms and the public;The confidentiality/privacy and access issues relating to publishing data about legal entities across borders;The operational and funding models for the global LEI system and ultimate LEI utility;The phasing in of the LEI initiative among countries, regions, asset classes and the expansion of the scope of reference data beyond the basic descriptive data.

The G-20 will also be getting a major report from the FSB’s progress at the Los Cabos Leaders’ Summit, June 18-19 in Los Cabos, Mexico. Before the G-20 summit, the FSB LEI Expert Group will deliver recommendations for the governance of LEI issues in April. The FSB is expected to finalize its endorsements in May.

“All the efforts before never came to a conclusion because the business case was not really there. If you need to change a certain number of things, you need to have a business case to kick off a project in any given organization. What changed after the crisis is the regulatory mandate. So, what I would say is that the carrot didn’t work but the stick does.”

—Paul Janssens, LEI program director for SWIFT

 

In the meantime, the FSB’s Expert Group earlier this month endorsed a 20-character alphanumeric code as the basis for the global LEI standard. The Expert Group is also reviewing LEI eligibility criteria and views six data elements as key to the minimum set of reference data attributes required by regulators for the launch of the LEI:

• The official name of the legal entity;
• The address of the headquarters of the legal entity;
• The address of legal formation;
• The date of the first LEI assignment;
• The date of last update of the LEI;
• The date of expiry, if applicable.

Deadlines and First Steps

If those milestones weren’t enough, the U.S. Commodity Futures Trading Commission (CFTC) has mandated the use of LEIs for its swap data recordkeeping and reporting requirements, starting July 16, 2012. In keeping with the global reach of the LEI initiative, the Hong Kong Monetary Authority (HKMA), the Canadian Securities Administrators (CSA) and the Australian Securities & Investment Commission (ASIC) have also committed to using the LEI standard and conforming to the new rules of the road as they emerge.

While the standards bodies do their work, firms will have to get ready for the CFTC’s July 16 deadline and that will take a few key steps Janssens says. The provisional LEI draft, an update of the version that debuted in January, is intended to help firms prepare for this first key step, he says. “We updated the XML schema and descriptions so that it matches even more what the firms are requiring,” he says. “Probably, the very first step is to secure the budget to do it.”

While situations may vary from firm to firm, most of them will have to sort out the level, quality and centralization of the data and records that will have to be mapped to the LEI, Janssens says. After reviewing the content of the provisional LEI, they will have to map LEIs to the internal databases. “So that they can identify the counterparties with a more accurate source of data,” he says. They will then have to distribute the LEI information to different lines of business within the firm—if the data is not stored centrally. They will also have to analyze the requirements of the CFTC in terms of the reporting they already do and how much more they will have to do.

Aside from the CFTC deadline, buy-side clients such as those that turn to sell-side firms for custodian services, are still asking questions, says Theodore Rothschild, executive director for Treasury and Securities Services, Global Market Infrastructures at JPMorgan Chase & Co.

“They don’t really understand how it’s going to work and what it’s going to mean for them,” Rothschild says. “We don’t yet have enough information from the regulators to really explain that in detail.” Agents and broker/dealers will likely have to make a bigger investment than the buy side.

“It’s the agents who have to implement it,” Rothschild says. “But they can also leverage the benefits of LEI reforms internally more than the buy side might need to—in the immediate term.”

A group of major firms, which includes buy-side players, are vying for first-mover advantage, Janssens says. “The large firms are certainly up to it because they already have reference data managers.”

For its first step in what will be a long journey, JPMorgan will be ready for the CFTC reporting this summer. “That’s been quite a challenge and that’s just a sliver of the work that needs to be done,” Rothschild says. At this juncture with so many more steps and regulatory time-lines to come, the firm is mainly focusing on planning.

“What’s most salient is what we’re doing in the background—getting our firm-wide architecture ready for LEI,” Rothschild says. “Over time, the goal is to replace myriad different numbers with just LEI and improve our own capability to understand our own firm-wide counterparty exposure leveraging LEI.”

But fully leveraging LEI will be a challenge.

“A transaction has a number of counterparties and as yet we don’t really know which LEIs need to be carried for the reporting,” Rothschild says. “Is it the investment manager? Is it the fund that the manager is investing on behalf of? Is it the counterparty broker that they’re buying from or selling to? Is it the agent involved? Or all of the above?”

For now, the LEI standard will become the overlay enabling the firm to cross reference its incumbent hardware and software. “As we go in and reengineer specific applications and lines of business databases, then we will take the opportunity to build LEI into our core and do away with cross referencing,” Rothschild says. “It’s a move toward overlaying and cross referencing rather than ripping out the guts and rebuilding. Nobody has bought any hardware or thrown out any hardware.”

Cultivating Pearls

Despite their reliance on the sell side, buy-side firms large and small are not likely to escape the messaging changes that the LEI initiative will bring.

“A pearl in that oyster for everyone is being able to understand your own counterparty exposure by much more quickly and much more clearly leveraging the LEI,” Rothschild says.

At this stage, it is difficult for JPMorgan and many others to accurately predict how long it will take them to complete an LEI overhaul. Much will depend upon on the time-lines from regulators.

“We’re hoping [the regulators] understand that this is a tremendous amount of work,” Rothschild says. “For a simple equity trade, you may want to pick and report the LEI for the investment manager, the underlying fund, the counterparty broker, and/or the agents involved.” Four to five LEIs may have to be embedded in JPMorgan’s messaging.

“A pearl in that oyster for everyone is being able to understand your own counterparty exposure by much more quickly and much more clearly leveraging the LEI.”

—Theodore Rothschild, executive director for Treasury and Securities Services, JPMorgan.

 

In addition, the custody industry will have to work with SWIFT for amendments to its messaging offerings, Rothschild says. “In order to be able to implement changes on SWIFT in November of 2013, the process is going on right now and suggestions are due no later June 1. Then it takes 14 to 15 months to implement.”

SWIFT and the standards bodies are also still defining how industry participants will pay for LEI registration, says Janssens. “That’s a discussion that’s ongoing. All of the important milestones are driven by the FSB process. … The access to the data will be free of charge. That’s a given.” This “downstream process” will be how firms retrieve the data they need.

“The upstream process, which is where the data needs to be put into the system— which is registering the LEIs—that is most likely what will be chargeable. The    amounts, which are in question there, are not significant,” Janssens says. “The economies of scale should be in play and the cost per entity will not be high.”

SWIFT may not be the one sending the bills.

“The governance stream will be defining how that will be put into place. The talks are about a separate vehicle that would be created, let’s call it an LEI utility … It’s this LEI utility that would operate the portal where all that will be possible. It would be this utility that would think about it,” Janssens says. “If the governance model goes as planned and expected, we will be a main actor in this LEI utility.”

At SWIFT and throughout the industry, expectations are high for the LEI initiative.

“The train has left the station and it’s running,” Janssens says. “But I think we need to take one step at a time. Priority No. 1 is to identify the counterparties in derivatives … and then it will evolve.”

While LEI specification appears to be benefitting from an accelerated process, the industry may need a healthy pause.

“I guess the key here for the industry is now that we understand what LEI is and now that we pat ourselves on the back for creating it so quickly, the next piece probably has to go a little bit slower,” Rothschild says. “The actual implementation of the reporting that will require changes and building the LEI into all our operational procedures and messaging is going to take a little more time.”

The regulators will have to understand that the LEI overhaul will have to be phased in so “that we don’t damage the efficiency in the industry to try to get to this reporting,” Rothschild says. “How much time? That’s hard to say. It will take all the time regulators give us and if they turn around and say do it next week, there will be hue and outcry about how that is not possible.”

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