11.14.2014
By Terry Flanagan

The Case for an LEI Utility

Legal entity identifiers represent the building blocks of regulatory compliance. The many-to-many relationships that characterize capital markets makes it essential that multiple banks doing business with the same party be able to identify it as such.

“LEI represents the lowest common denominator of information that is required in the client data management space,” Ron Jordan, chief data officer at Depository Trust & Clearing Corp., told Markets Media. “It is an important first step, because it makes possible a global free-to-use database of entity information whose data quality is considered to be very high.”

The Global Legal Entity Identifier Foundation, created by the Financial Stability Board, will begin to take full operational management of the Global LEI System, under the oversight of the LEI Regulatory Oversight Committee.

Under an interim system established in 2013 under the supervision of the ROC, 16 endorsed “pre-Local Operating Units” (pre-LOUs) had assigned almost 300,000 “pre-LEI” codes to entities for use in regulatory reporting.

According to a study published by Aite Group and commissioned by the DTCC, 80% of respondents believe global OTC derivatives regulation and Fatca pose the greatest operational challenges for entity data management processes due to the numerous checks and classifications that need to be applied to LEI data.

“Global regulations are a big driver for firms to be looking at this now,” Jordan said. “The ramifications of getting it wrong have increased as regulations have increased, so that’s why firms are looking towards mutualized solutions to help them with client reference data.”

Virginie O’Shea, author of the Aite Group study, said in a statement, “It is worrying that 70 percent of firms are still using legacy manual processes to ‘onboard’ clients, exposing themselves to increased costs and operational risk. The tide is however changing with regulatory requirements and fear of penalties among the key drivers. There is an increasing focus on streamlining processes that can support legal entity data in a holistic way, from client onboarding all the way through to settlement processing.”

DTCC, together with six banks, has established a platform, Clarient Entity Hub, to centrally store legal entity data and client documentation for the financial industry in order to meet new regulations.

“It’s a centralized hub where both the data and the documents will be gathered, stored, and maintained, and then as firms need them to on-board clients, they go to the central data source to get the data that they need to do their KYC,” Jordan said. “The utility is gathering the documents the clients need and storing them in a single place, reducing the costs and inefficiencies of having many firms send the same documents to many clients.”

The utility approach is possible because “the information is generally not commercially differentiated information,” said Jordan. “Firms are not competing on master file information. One way that the industry can reduce this cost is to establish a central database and have everybody use it.”

Featured image via Dollar Photo Club

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