Development of a global system for uniquely identifying counterparties to financial transactions is taking place through a coalition of industry service providers and international standard-setting bodies.

The use of legal entity identifiers (LEIs) is designed to create and assign unique identifiers to every financial organization worldwide that engages in a financial transaction.

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

The Canadian Securities Administrators (CSA), the council of the securities regulators of Canada’s provinces and territories, in its 2011 consultation paper on trade repositories for OTC derivatives (Consultation Paper 91-402), proposed assigning a unique LEI to each derivatives market participant based on universal standards.

“The implementation of standards such as legal entity identifiers, designed to provide a common language to identify legal entities, can provide a higher level of accuracy than can be applied to reduce levels of capital adequacy,” said Darren Marsh, business manager, risk management and compliance services at Interactive Data, a provider of financial markets information.

“It could also provide efficiencies to the data management process through increased STP [straight-through processing] and increase accuracy levels of internal risk modeling and monitoring.”

Proponents of LEIs say the system will greatly aid transparency.

“Building entity trees and rolling that model up to the entity level is difficult, so LEIs will help,” said Bob Proctor, vice-president of compliance product management at Linedata, a provider of financial software and services. “Data aggregation is key to controlling systemic risk, so firms need to be able to aggregate across many different systems and entities.”

In the U.S., derivatives regulator the Commodity Futures Trading Commission has proposed a universal international standard consisting of three unique identifiers to facilitate data aggregation by regulators across counterparties, asset classes and transactions: a unique counterparty identifier (UCI), a unique swap identifier (USI) and a unique product identifier (UPI).

The CSA, which co-ordinates and harmonizes regulation for the Canadian capital markets, believes that Canadian referenced derivative transaction identifiers should also be required, and will monitor international developments to propose that country specific identifiers be a part of any uniform standards developed.

Separately, the Financial Stability Board (FSB), the G20’s regulatory arm, has requested that the International Organisation of Standardisation (ISO) remove the role of registration authority from the new LEI standard ISO 17442.

In the opinion of the FSB, removing the registration authority function from the ISO standard will simplify the governance model of the global LEI system and eliminate potential conflicts between ISO and FSB, two separate governance systems.

Even in the absence of a registration authority, Swift—the leading worldwide financial messaging service for international money transfers—will have a role as part of the central utility responsible for allocating, validating and distributing LEIs.

“This is a change in terminology rather than functionality,” said Paul Janssens, LEI program director at Swift. “The tasks of allocating LEIs and validating and distributing data do not change. In function of the operational model and the implementation phasing that is being defined, it will be determined which functions are central and which functions are federated.”

A revised draft version of the ISO 17442 standard has been distributed to the ISO members for a 30-day ballot.