An initiative between the public and private sectors to create a system of legal entity identifiers (LEIs) has been kicked off by the Financial Stability Board, the regulatory task force for the G20 group of nations.

An LEI Implementation Group is to be established to launch the global LEI system on a self-standing basis no later than March next year.

Regulators will use LEIs to better gauge systemic risk, and risk managers at financial institutions will use LEIs to better understand and aggregate counterparty exposures and risk.

“A global standard to identify legal entities like issuer and counterparties will greatly aid transparency,” said Bob Proctor, head of product management at Linedata, a software provider. “Data aggregation is key to controlling systemic risk.”

The initial reference data available at the launch of the LEI will include information such as the official name of the legal entity and its address, along with a 20-digit alphanumeric code, corresponding to the recently-issued ISO standard 17442 for a legal entity identifier.

A large portion of a trade record is composed of reference data and a significant amount of transactions breaks are caused by poor quality reference data.

Some of the building blocks for a global LEI system are already in place. Markit, the data and post-trade services provider, for example, offers a system for the identification of credit-derivative long legal names based on its reference entity database (RED) service, which addresses legal and operational risks in the credit markets, including mismatched trades and incorrect internal aggregation of credit risk.

An extensive legal verification process of company documentation from local jurisdictions confirms a reference entity’s long legal name and its relationship in a pair to a reference obligation.

“Reference data is about tracking the relationships among entities, issuers and counterparties,” said Ed Chidsey, managing director and group head of data services at Markit. “It gets more complicated when you’re dealing with derivatives, because a CDS trade references both an entity and a bond, or reference obligation.”

The database currently contains 12,000 reference entities traded in the credit derivatives market, covering 6,000 reference obligations.

The FSB recommends a three-tier structure for the global LEI system: a regulatory oversight committee (ROC), a central operating unit (COU) and a local operating unit (LOU).

The ROC will have the ultimate responsibility for governance of the LEI system, while the COU is the pivotal operational arm of the global LEI system, with responsibility for ensuring the quality of the LEI and proving open access to the LEI and to high-quality reference data. LOUs will provide the primary interface for entities wishing to register for an LEI. As such, they will be the local implementers of the LEI system.

The FSB was given a mandate by the G20 in 2011 to deliver concrete recommendations on the LEI system by this month.

As the finance industry’s selected facilities manager for the project, the Depository Trust & Clearing Corporation (DTCC) will collect requirements for new LEIs to be created, validate the information, maintain and store reference data associated with each LEI and maintain public distribution of the LEI database.

The DTCC will operate the core LEI utility as the central point for data collection, data maintenance and LEI assignment.