LEI Codes Up and Running Quickly. Maybe Too Quickly.
December 10, 2012
Being first isn’t always being best. That’s seems to be the teachable moment emerging from the two tracks now being pursued that hope to lead to a unified system for identifying participants in financial transactions, worldwide.
The overall program is known as the Global Legal Entity Identifier System, a hugely ambitious project on a tight schedule for introduction next year. In preparation for the G-20 meeting in Mexico City on November 4 and 5, the Financial Stability Board (FSB) submitted a progress report to finance ministers and central bank governors on the implementation of the Global LEI System.
Event:
LEI Seminar - Implementing a Global LEI Framework
Tuesday, December 11, 2012, SIFMA Conference Center, New York, NY
“The train has left the station,” adds Rudolf Siebel, Managing Director of BVI Bundesverband Investment and Asset Management. The system’s Regulatory Oversight Committee should be established in January and the Central Operating Unit, which will create and maintain the global system, is expected to be in place in March, he said.
However, Siebel says, the global system realistically won’t begin to be operational until the beginning of 2014, but, he notes, designing a building a global initiative that meets the broader needs of diverse regulators and the financial industry worldwide and balancing and coordinating among private public and government interests, is one of the biggest challenges the financial and regulatory bodies have ever confronted.
Meanwhile, the Commodity Futures Trading Commission, which has had to fulfill requirements of the 2010 Dodd-Frank Wall Street Reform Act to create safe markets for the trading of interest-rate and credit-default swaps, began issuing its “interim compliant identifiers” the first week of August. The operators of this system are the Depository Trust and Clearing Corporation and the Society for Worldwide Interbank Financial Telecommunication.
DTCC and SWIFT so far have assigned ID codes and validated information on about 35,000 entities, says Paul Janssens, LEI Program Director at SWIFT.
This reform-driven move has led to a potential departure from an international standard on how the ID codes get structured. The codes issued by the DTCC and SWIFT, so far, are totally random sets of numbers and letters. Meanwhile, the FSB has called for the 20-digit codes to have some structure to them, with some digits, for instance, identifying the so-called “local operating unit” that issues each ID.
This two-part construction makes it easier to keep track of codes, according to Allan D. Grody, president of Financial Intergroup, which first recommended to the FSB that there be multiple issuers of the numbers, around the world. Those “local operating units” would be overseen by the “central operating unit” which in turn would be monitored by the “regulatory oversight committee” composed of systemic regulators from around the world.
A unified system is need “especially for the larger multi-nationals that will have hundreds if not thousands of LEIs,’’ to track, Grody notes.
At this point, the FSB has indicated that the “interim” identifiers will be let stand and additional characters be added in front, to identify and track them, as part of the overall system.
But the CFTC ran into an unexpected roadblock on November 8, only three days after the G-20 meeting in Mexico City had concluded. Exchange operator CME Group, asked a U.S. court to prevent the CFTC from enforcing swap-reporting rules passed after the 2008 financial crisis.
In the lawsuit, CME challenged the requirement that exchanges make available non-public reports of cleared swap transactions to new CFTC-registered entities called "swap data repositories" (SDRs) which would, in turn, make the swap data available to the CFTC. The CME suit set off countersuits and a fiery debate about how the interim CICIs should be processed and stored.
Specifically:
• DTCC filed a motion with a U.S. District Court in Washington, D.C., to intervene as a defendant on the side of the CFTC in the case filed by the CME.
• CFTC amended its swaps policy which meant that CME could compete with DTCC and form its own repository for swaps-related data.
• CME dropped its suit against CFTC.
• DTCC lashed out at the CFTC. “The Commission's action unexplained and an abrupt reversal of course. This action is inconsistent with the Commission’s previous actions, and will cause market participants to question the finality of any Commission rule or interpretation. This will ultimately disrupt the progress the industry and regulators have achieved so far to implement the financial reforms mandated by the Dodd-Frank Act.
" What's happening is that lots of people are grabbing onto pieces of the LEI process without thinking about the overall objectives, that of systemic risk analysis,” says Grody. “That, in turn, begs the question of how to use hierarchies of these LEIs for cash flow and valued position aggregation. Without understanding that, not a single LEI should be issued."
And the European take on this? Siebel says he is OK with having more than one repository. “The only thing that would concern us is if an entity would get two identifiers if CME could also issue its own CICIs.”
Says Grody, "If CME creates an SDR, which they are planning to, they will be able to assign their own CICIs according to swaps regulations.”
That means, according to Grody, the FSB will have to determine just how many different types of ID codes will have to be united under its banner – and how to do that, if the CME and the CFTC each have different approaches to the 20-digit codes that were to be part of a single, global system.
