SIFMA OPS 2012: LEIs Are Almost Here. They Wont Cure Cancer.
May 3, 2012
Legal entity identifiers, or LEIs, are almost here. Fire up your browser.
That’s because registering to get 20-character identification codes for your firm or your counterparties will be similar to the sign-up process for a Web site.
The Web portal that will take in names, addresses and other basic details of firms registering for the codes will be opened June 1, by The Depository Trust and Clearing Corporation.
Driving that date is the launch of centralized clearing of credit-default and interest-rate swaps, under the supervision of the Commodity Future Trading Commission. The CFTC is requiring the codes beginning July 16.
Both LEIs and the central clearing of swaps are outgrowths of the Dodd-Frank Wall Street Reform Act of 2010. The clearing of swaps puts a central counterparty in between both sides of a trade. The idea is to shield each party from each other, with the central counterparty guaranteeing each end of the transaction.
But all parties need to know who, ultimately they are dealing with. And the LEI system, in the end, is to allow financial firms and regulators track transactions and positions back to whatever “legal entity” is the “ultimate parent” of a firm taking part in a securities transaction.
This will help the firms and the market overseers see whether positions are building up to risky levels with any given entity or type of security. The idea, in effect, is to improve both micro- and macro-analysis of risks to financial markets, here and abroad.
The coding will make for more efficient processing of transactions, along the way, eliminating duplicative conventions for identifying parties involved.
All this from a database that one day could hold identification codes for more than a million firms, worldwide. And, at the beginning and end of day, be maintained as a public good, free to any user anywhere.
But there are a couple things the identification system will not do.
“The LEI will not cure cancer,’’ said DTCC managing director Bill Hodash at the Securities Industry and Financial Markets Association 2012 Operations Conference in Phoenix Thursday. More practically, for operations managers, “the LEI will
But it will let you analyze positions on a “globally integrated basis” and that will be useful not just every day, but “particularly in times of market crisis," when billions of dollars of cash and securities financial firms owe to each other come under pressure.
The introduction of the codes will affect 20,000 to 50,000 firms in the swaps industry, initially. When mature and widely used across all types of securities markets, Hodash figures the number will surpass 1 million.
In most cases, firms will simply register themselves. But, if they want to register the names of counterparties they deal with, they can.