To accompany our recent webinar on Entity Data Management & the LEI, we asked participants to give us their thoughts on the key discussion themes. Here is Peter Warms, Head of Product Development for Global Data and Symbology, Bloomberg. You can hear the entire webinar here, or read a summary here.
Starting with upgrades to the GLEIS, the ROC recently set down the first elements of a common data format for the LEI that is designed to allow pre-Local Operating Units (LOUs) to share data more easily. How easy is it to comply with the format and to what extent will it improve data quality?
The creation of a universal common data file used across all global LOUs has been a discussion topic for many months. Until mid-2013, a common format was not in high demand due to DTCC and WM Datenservice being the only two providers of LEIs. The ability to monitor and standardize two feeds was manageable; however the recent surge in actively issuing LOUs has stressed the LEI acquisition process. The technology required for LEI acquisition consists of monitoring a dozen feeds in .csv, .xml and/or .ftp format along with the normalization and integration of new LOU feeds.
In the last few months, the Regulatory Oversight Committee actively solicited feedback from the ROC Evaluation and Standards Committee (CES), the Private Sector Preparatory Group (PSPG), and other financial data stakeholders. The preliminary format announced on 24 February should enhance data quality across all LOUs significantly. By incorporating ISO standards, data feeds will now adhere to a consistent and universally recognized format. From a technology standpoint, this is a critical enhancement that will provide for the timely on-boarding of new LOUs. For example, currently across all global LOU feeds, the LEI is listed within csv and xml formats as “LEI”, “GEI”, “Pre-LEI”, “LegalEntityIdentifier”, and even “LglNttyIdr”. By accepting common and universal standards for data feeds, we reduce confusion by consistently using “LegalEntityIdentifier.” This is one example of an improvement that will be replicated across 20 more fields.
Over recent months, the ROC has also augmented the GLEIS by endorsing more pre-LOUs. Roughly how many pre-LEIs have been issued so far and will more endorsed pre-LOUs push up issuance and adoption significantly?
In early October 2013, the ROC released its initial statement endorsing Local Operating Unit LEIs for use within regulatory reporting. This endorsement deems LEIs, with an associated LOU’s pre-fix, acceptable under CFTC and EMIR regulations. Since the initial announcement, the ROC has endorsed a total of 13 LOUs including DTCC (US), WM Daten (Germany), INSEE (France), Takasbank (Turkey), LSE (UK), Irish Stock Exchange (Ireland), National Settlement Depository (Russia), KDPW (Poland), Dutch Chamber of Commerce (Netherlands), PRH (Finland), CDCP (Czech), the Italian Chamber of Commerce (Italy), and most recently, the Commercial Register of Spain. There are an additional seven LOUs that have been assigned pre-fixes, but have yet to be endorsed by the ROC.
The issuance of LEIs has accelerated in the early months of 2014. On January 1, the global LEI system issued an estimated 113,000 LEIs to the public, and 53 percent of them are U.S. incorporated.
The issuance of LEIs has doubled this year. There are now more than 220,000 LEIs available but this has minimized U.S. representation to 28 percent. Although the issuance is positively correlated with the ROCs endorsement of LOUs, we would believe this is correlated with EMIR regulations rather than ROC endorsements. Since February 12, EMIR regulations require counterparties to use the LEI as the primary identifier in mandated regulatory reporting practices. This is a major win for the global LEI system. Our expectation is that acceptance of the global LEI system will be driven by new regulatory mandates even though LOUs play a pivotal role in the deployment of European based LEIs.
A notable absence in the interim global system continues to be the Central Operating Unit (COU). How is LEI data integration being handled in the absence of the COU and is it working well?
As briefly mentioned earlier, the absence of a COU is noticeable. At the moment, we know that the COU will be established in Switzerland, the date this authority will become operational is still to be announced. The absence of a COU means the data integration process consists of monitoring 13 individual LOU feeds. This creates a complex integration process for data systems that need to understand LOU-specific data attributes, acquire multiple delivery methods at varying times, and filter through LEI duplication across LOUs. The establishment of a COU is critical to alleviating current vulnerability concerns, implementing consistent acquisition techniques, and establishing the necessary oversight over LOUs. The COU will be able to provide one global primary file of consolidated LOU LEIs that meet ISO standards and provide a consistent global LEI data set.
When do you expect the COU to be formed, who will operate it and what benefits will it deliver to market participants?
As eluded to in previous questions, the COU will provide for improved quality and consistency in the assignment and transmission of LEI content. Unfortunately, we are unaware of a likely time-frame, but suffice it to say that the sooner it opens its doors, the better.
Although the interim LEI system has yet to transition into a truly global system, LEIs have been a mandatory requirement for reporting under European Market Infrastructure Regulation (EMIR) since February 12. How is the industry responding to the regulation?
EMIR mandates prompted a dramatic increase in the number of LEIs issued in Europe.
While global adoption of the LEI system benefits all market participants, the system itself needs oversight and direction. If and when future LOUs are established from non-LOU countries, jurisdictional preference cannot prevail over data management principles. This happened when the ROC agreed to remove 18k LEIs last year. Purged LEIs were not self-certified and generally not used. The reason behind the creation of one standard entity identifier was to guarantee that it could represent, or correspond to, one entity uniquely. Because these LEIs were dropped, the entity self-registered for a different LEI issued by a different LOU, meaning the value the LEI was intended to impart was severely jeopardized. Potential duplication has the ability to eradicate confidence and hamper global acceptance.
What advice would you give to practitioners who must integrate and use LEIs to comply with EMIR reporting and forthcoming EMIR requirements around derivatives trade clearing and risk mitigation?
The majority of practitioners depending on LEIs for regulation compliance have completed the necessary steps to integrate LEIs into their databases. If they have not, they should integrate the identifier before regulatory mandates take effect. For LEI mapping purposes, practitioners can look to data vendors, such as Bloomberg, to aid the synchronization with multiple local operating units and data mapping processes. Practitioners can expect data vendors to use various identifiers, resources, and technology to help with the strenuous mapping process.
A key piece to recognize is that the LEI is not solely a mapping activity; it is geared towards enhancing financial data risk management systems. In order to comply with regulatory reporting, it’s necessary to understand full counterparty exposure, which not only includes business card identification data, but also understanding the classification, relationships, and geographic exposure for all LEI entities. Bloomberg collects these basic sets but more importantly provides the means to link the entities and their subsidiaries to one another through common symbology. In addition, paring the debt obligations back to the entities through these same identifiers allows for more efficient exposure aggregation.
Is there merit in promoting the LEI as a business case for reviewing and renewing entity data management systems?
Yes. The LEI provides a tremendous opportunity to review existing entity databases. In the wake of the financial crisis, and the growing use of the LEI for regulatory reporting, financial institutions realized that individual asset class databases were not effective without a common thread to aid data integration. The LEI indirectly suggested that data practitioners reconsider traditional data models in favour of a new model that places entity content, inclusive of the LEI, above individual asset class databases. More sophisticated approaches will incorporate KYC (Know Your Customer) and on-boarding activities to the new entity databases.
Pending regulations will require financial institutions to analyse exposure to a particular entity, as an obligor or creditor. In order to do this, institutions need to be able to identify and track an entity by number, not merely by its name. The LEI will help the entity tracking and risk analysis process. The LEI may not solve all post-crisis issues in the capital markets system, but it does enable banks and other large financial institutions to identify and mitigate risk exposure more effectively.
While EMIR is driving the use of LEIs in Europe, what will be the next regulation to drive their use in the US?
The financial crisis changed the global capital markets forever. Regulatory reforms such as Dodd Frank, EMIR, BASEL III, and the forthcoming FATCA initiative, are all credit and risk focused, with entity exposure playing a vital role. As a result, many of the biggest banks are developing new databases for entity content. Whether or not ‘use’ is increasing is not necessarily the issue, instead what is critical to consider is the fact that the biggest banks are investing heavily in new systems that will drive present and future entity centric usage.
Finally, will the use of LEIs by market participants eventually eclipse the use of market data vendor and proprietary entity codes, or will the mapping exercise continue?
Although the volume of LEIs is growing dramatically because of the adoption of ISO standards and regulatory compulsion, the scope of the LEIs usage is still in question. Bloomberg’s entity identifier, like other existing entity identifiers, preceded the LEI and is used today by more than 100 data vendors, exchanges, software and data providers. Bloomberg’s entity identifier is assigned to more than three million entities (vs 220k current LEIs). Over time, the LEI has the potential to become a very useful tool for a variety of data management and integration practices, but it is unlikely that the LEI will become the default identifier of choice across the industry. As such, we anticipate that mapping exercises, and support for those practices, will continue.