LEI Benefits Emerge As Implementation Progresses

The success of the legal entity identifier (LEI) initiative is becoming less of an open question, and less subject to doubt. Nonetheless, implementation challenges remain, notably in the consumption and management of LEIs being generated, the possibility of additional regulatory and administrative actions, and navigation of how national numbering agencies will work with LEIs.

At the same time, benefits are emerging in the form of improved data quality and clearer organization of identifier data within firms, according to executives for LEI issuers and administrators, service providers, and data management departments at trading and investment firms who expressed their views at the European Financial Information Summit held in London on September 16 and in an Inside Reference Data webcast, "LEI: Looking For The Horizon," on September 18.

"The registration process is one of the easier steps in the whole LEI lifecycle," said Ari Marcus, head of entity data operations and institutional client and account technology at Citi. "A lot of the operational demands that are still developing are really on the consumption side of firms that need access to a global, centralized list of LEIs to bring into their internal systems, which they can map to their IDs and integrate into their client information ecosystem for reporting and internal usage."

Roughly 300,000 LEIs have now been issued globally. "Many market participants think that one million is the magic number, representing critical mass in which most major entities in the financial landscape would have LEIs," said Scott Preiss, vice president and chief operating officer, CUSIP Global Services.

Campaigning For Critical Mass

The understanding of LEI requirements and needs has increased. A poll question posed to listeners on the webcast asked if firms had a clear understanding of LEI registration and filing requirements - 42% said yes; another 38% said they were working on it; and 19.7% said no (figure 1). "This is promising," Preiss said of the poll results. "Earlier groups I participated in would say it was more like 10% who understood the requirements. It shows a marked improvement over the past year from where the industry was before. There is still more work to do, but the trend is definitely very promising."

Gerard Hartsink, chairman of the Global Legal Entity Identifier Foundation (GLEIF), the body established by the Financial Stability Board (FSB) to set up and operate a central operating unit (COU) for the LEI system, said the next step for GLEIF is creation of a master agreement defining how to "legally and technically organize the relations between partners in the LEI system."

Local operating units (LOUs) are the "partners" in the LEI system that Hartsink described. A poll question posed to listeners on the webcast asked if the number of markets with local operating units (LOUs) in place to administer LEIs had reached a tipping point - 31% said yes and 69% said no (figure 2).

Unlike the critical mass or tipping point for numbers of LEIs, there is not necessarily such a milestone for LOUs, according to Preiss. "If we combine sponsored LOUs, recognized LOUs and pre-LOUs, maybe 14 of them today are actually generating LEIs in real time," he said. "That's the disparity right now." To get to a critical mass of LEIs, more LOUs must be put in place, Preiss added.

Getting critical mass, however, could be helped significantly by regulatory action, as it was in February when a deadline included in European Market Infrastructure Regulation (EMIR) led Citi to register 9,000 internal IDs at the firm as LEIs, according to Marcus.

Hartsink also points to other ways to propagate LEIs, such as inclusion in corporate annual reports. The more the LEI is adopted, the lower the costs will be, he said.

Still, some parties who should be registering LEIs, such as participants in the US municipal bond market, are pushing back on LEI registration, according to Preiss. This is even though CUSIP's registration portal also can issue LEIs simultaneously. "Without regulatory compulsion, we need to provide that option," he said. "We would prefer that there wasn't an opt-out, but without compulsion, there needs to be."

Numbering Agencies' Role

When LEIs have not yet been issued, national numbering agencies (NNAs), many of which have become LOUs, can play a role individually or collectively through the Association of National Numbering Agencies (ANNA), to coordinate and push forward LEI assignment, Preiss observed. "NNAs have vast local relationships with the issuer community as well as the broader financial community," he said.

CUSIP acts as an NNA and works with the Global Markets Entity Identifier (GMEI) utility operated by Swift and the Depository Trust & Clearing Corporation. "Under that collaboration, more than 8,300 LEIs have been requested simultaneously with application for a CUSIP number or ISIN code," said Preiss. "After our team applies data scrubbing and de-duplication, that has resulted in a net of about 4,000 new LEIs distributed to the market. The industry response has been very favorable and specifically very successful in the corporate trust and fund communities."

Another NNA turned LOU, the London Stock Exchange (LSE), has intensified and focused its collection of identifier data, according to Emma Kalliomaki, head of SEDOL masterfile at the LSE, who also serves as executive secretary of ANNA. "Rather than just capturing an event... we will adapt what numbering agencies are capturing," she said. "Introducing LEI across all data collection processes is something entities are doing."

CUSIP, similarly, is coordinating LEI requests for CUSIP or ISIN requests, according to Preiss. "Our subject matter experts will prioritize and standardize up to 60 discrete data element or data points that guarantee uniqueness at the instrument or issuer level," he said.

Sourcing Identifiers

The sourcing of data and its bearing on data quality "has always been a prerequisite in the instrument identification space," said Preiss. In various jurisdictions around the globe, varying levels of scrutiny are required to incorporate an entity or register an entity in those jurisdictions. The chain of title and legal offering documents associated with an entity could be in question depending on jurisdiction, time frame and how frequently that information is updated and what sort of investment registration houses in various countries are putting into that process. We've noticed that market participants are extremely aware of that and concerned about it, and we share that concern.

"At the same time, we're very proud of some of the data provenance and data integrity expertise that numbering agencies and utilities like GMEI bring to the forefront," he added.

Essentially the LEI is "another input" for data quality, said Marcus. "Whenever we create internal records, we always go out to third-party sources to make sure the provenance of the information is accurate," he says. "We have relationships with other third-party vendors that help us maintain the quality of our information. Now we're using the LEI info as another input into that process of managing the quality of our client records."

Whatever growing pains the LEI has or had can undercut confidence in determining the correct LEI for the right entity, according to Marcus. Data managers rely on attributions for LEI information to improve the quality of their identifier records, he said. However, the LEI is making it possible for firms to standardize their identifiers internally, he added.

"Mapping the LEI to our internal unique ID integrates with the central source of client information, which not only helps us meet regulatory requirements, but helps our internal functions, helps users speak with each other and helps us manage our operational risk because we have more of our data ecosystem going to one source for client information," said Marcus.

The LEI also can stand in for organizations without single unique client identifiers, according to Allie Harris, director, policy and compliance data management group at CIBC. "It's at least a crowdsourced information source for your client information facility," she said.

Data Quality Applications

The LEI improves data quality by acting as a tool for consolidation across systems, creating a common language and figuring numerous data items into reference data, explained Silvano Stagni, group head of research at Hatstand, a consultancy. "Even internally, firms can use an LEI system - the structure of the LEI is that it can be interchangeable internally across systems and branches," he said.

The LEI also is a failsafe in cases where the only other way to tell that two entities are different is through a description, according to Stagni. "It's very easy to get ambiguities and miss the point," he said. "The LEI provides the tax identification code... We're still at what you have to do, not what you could do with it."

Avoiding duplication of identifiers is another value provided by LEIs, according to Neville Homer, head of risk-weighted assets reference data and data services at RBS. "If you don't have a central system or central identifier, when the LEI comes in, it can be tagged onto entity data, but the power comes when you actually compare it to external sources and ensure that you aren't duplicating it," he said.

Standards Revisions

The mechanics supporting the LEI are still being revised. The ISO Technical Committee for Financial Services (ISO/TC 68) has proposed work on a standard for Entity Legal Forms that would complement the ISO 17442 standard for LEI filing, according to Karla McKenna, chair of ISO/TC 68.

The proposed work on Entity Legal Forms is out for vote until early December for members of ISO/TC 68 to decide whether to proceed with the work. If approved, ISO/TC 68 will then form a working group to develop the new standard.

ISO/TC 68 will continue to engage with the Regulatory Oversight Committee (ROC), the LEI regulatory body established by the FSB, to determine whether the Entity Legal Forms standard work could be leveraged and adopted by the Global LEI system.

"The industry is able to focus on linking clients' identification and account records to the LEI as a global standard, to use the LEI even across areas within their institutions that have grown up with unique identifiers," McKenna told Inside Reference Data during Sibos in Boston. "The standard itself is very stable."

With standards such as the ISO format being honed, and the functions of central and local operating units for LEI registration being solidified, the mechanics of LEI registration and data distribution are becoming clearer.

Undoubtedly, this progress is bringing the LEI initiative closer to success at its stated goal - linking issuers, entities and obligors through a single identifier to facilitate risk management or asset management in a crisis.