CFTC Choice for LEI Process Too Random: Expert
July 24, 2012
So, the Commodity Futures Trading Commission has spoken on the subject of creating legal entity identifiers, choosing the alliance of the Depository Trust and Clearing Corporation and the Society for Worldwide Financial Telecommunication to register and maintain a system of identifying all parties to swaps transactions under its supervision.
But at least one expert, Allan Grody, President of Financial InterGroup, questions whether this selection would indeed be robust enough for the challenge. One major concern of his, the DTCC’s plan to use random assigned codes.
“The DTCC has filled it with a random assigned code,” he says. “We think this will not scale globally in the federated model the FSB has defined whereas DTCC is promoting a centralized approach.”
His company is a competitor in the proposals for developing an LEI system.
The CFTC announcement is the first designation of a registration authority in what ultimately expected to be a worldwide system of creating legal entity identifiers.
In the CFTC case, the two parties will issue what currently are known as CFTC Interim Compliant Identifiers or CICIs. These will adhere to standards set by the International Organization for Standardization, until a global system based on those standards is set up.
The Financial Stability Board earlier this summer recommended to the leaders of the G-20 industrial nations a three-tier hierarchy of an oversight council, local registration authorities and a central operating body to issue the codes and establish a computationally logical means of maintaining a worldwide database of the registered numbers.
In the CFTC case, the codes will be used in the aggregation of data on derivatives trades. The use of credit default swaps were a central cause of the credit crisis of 2008 and the 2010 Dodd-Frank Wall Street Reform act mandated that a system of standardized swaps traded through electronic execution facilities be supervised by the CFTC.
“It seems to me the CFTC passed on the heavy lifting to the DTCC to work with the FSB to see if it’s centralized model works longer term and that the CFTC’s Interim Compliant Identifier (CICI) works within the US for all financial market participants within a Global LEI system,” Grody said. “It is my thought that this was a King-Solomon-like decision on the part of the CFTC to try and take control of the FSB’s (global regulator’s) process and have the US lead on this.”
The problem, he says, is in the detail of the LEI code structure itself. The endorsed standard promulgated by the International Organization for Standardization, ISO 17442 LEI code standard is a 20 character place holder for a code, not the code itself.
Just randomly assigning numbers firstly, according to Grody, could lead to duplicate number assignments. It also leaves no rhyme or reason whatsoever to the structure of these numbers, which will become a problem down the road. These numbers will be immediately important for tracking swap participants, but will become essential for a growing number of applications on financial computer screens and even legal documents.
“This is a strange way to build one of the most important global identification systems in the industry or even the world,” he said.