Increased legal entity identifier issuance improves reporting

The growth of legal entity identifier issuance has improved reporting, which has enabled greater sophistication in data analysis and evaluation of systemic risk, writes William Hodash of the Depository Trust & Clearing Corporation

William Hodash, DTCC

The use of legal entity identifiers (LEIs) is no longer in its infancy. With almost 390,000 issued worldwide by 26 endorsed local operating units (LOUs), significant progress has been made in using the LEI for increased transparency and risk mitigation in the financial markets. In addition, robust public sector oversight and private sector governance mechanisms have been firmly established via the Regulatory Oversight Committee (ROC) and the Global LEI Foundation (Gleif).

Nevertheless, further measures must be carried out to ensure the Global LEI System (Gleis) becomes one of the key pillars of systemic risk management in the new regulatory framework. This article provides a brief overview of developments in three of those areas.

Capturing every asset class

The US and Europe were the first major jurisdictions to demand LEIs for derivatives record-keeping and reporting. More recently, we have seen the use of LEIs extend outside these jurisdictions to include LEI requirements in derivatives record-keeping and reporting rules in Australia, Canada, Hong Kong and Singapore. However, the market must move beyond derivatives to ultimately include all financial institutions and their counterparties in all asset classes being identified by LEIs.

We are in fact beginning to see the application of LEIs to other asset classes and types of reporting. In the US, for example, the Securities and Exchange Commission (SEC) has added an LEI mandate to its proposed rule on investment company reporting modernisation. If the rule is finalised in its current form, funds registered with the SEC will need to identify themselves and various classes of counterparties with LEIs. The SEC has also finalised the use of LEIs for record-keeping and reporting of security-based swaps.

In Europe, even broader LEI mandates are appearing. At the time of writing, we expect to see clarity around LEI mandates in reporting once the Markets in Financial Instruments Directive II regulatory technical standards are published by the European Securities and Markets Authority this month. Another major uptake of LEIs is likely to result from the implementation of Solvency II across the European insurance industry in January 2016.

Consolidated LEI file

Regulators, the Gleif and the LOUs have also been working together to improve the quality of legal entity reference data associated with LEIs. A significant step was the creation by the ROC and adoption by all the LOUs of a common data file format. It is envisaged that in the near future the consolidation by the Gleif of each LOU's common file will enable it to publish a single golden copy consolidated file, which will provide market participants and regulators access to a single file of all LEIs and reference data.

Relationship and ownership data

The first phase of the LEI with public, "business card" reference data on all legal entities that participate in financial markets, driven by regulatory mandates and available free in a consolidated, common file, represents a critical tool for improving systemic analysis. With that in place, the initiative will move towards collecting and making available data regarding relationships between legal entities and their ownership. This second phase of the Gleis will enable market participants, data vendors and regulators to build improved versions of hierarchies of legal entities, further improving the ability to analyse aggregated exposures.

The great progress in establishing an operational Gleis in just three years is a prime example of public and private sector collaboration on a global scale. The Gleis is well on the way to helping regulators improve systemic risk analysis, and has enabled financial services companies to improve counterparty risk management while reducing the cost of collecting and keeping accurate legal entity reference data.

It is encouraging to see the Gleif, with support from the ROC, LOUs and market participants, continue to advance its efforts in ensuring that the objectives of the Gleis can be fully realised.

William Hodash is managing director of business development at DTCC.

This article first appeared on sister website WatersTechnology.com.