CFTC Blesses Legal Entity Identifier Project

Terry Flanagan

The Commodity Futures Trading Commission (CFTC) has issued an order designating the Depository Trust & Clearing Corporation (DTCC) and Swift as the provider of the legal entity identifiers (LEI), which will be used by registered entities and swap counterparties in complying with the CFTC’s swap data reporting regulations.

The move is the latest in a series of actions that to create a global system by which the CFTC and other financial regulators can use swap data to monitor and mitigate systemic risk and promote market transparency, both key objectives of the G20 financial reforms.

“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 that 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 market data and analytics.

“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.”

LEIs, to be known as CFTC Interim Compliant Identifiers, or CICIs, until establishment of a global LEI system, are essential tools for aggregation of derivatives data.

The CFTC order designates DTCC-Swift as the provider of the CICIs to be used in recordkeeping and swap data reporting pursuant to parts 45 and 46 of the Commission’s regulations. This designation is made for a limited term of two years.

Firms involved in the OTC credit and interest rate derivatives markets will shortly be able to register for and be assigned an identifier using DTCC and Swift’s system prior to the effective date of the CFTC transaction reporting and recordkeeping rule.

CICIs will be required to be used by counterparties in those markets 60 days after certain swap definitions are published by the CFTC in the Federal Register.

While the CFTC has finalized those definitions, they have not yet appeared in the U.S. Federal Register, although they are expected shortly.

“In addition to helping the industry cost-effectively meet this regulatory reporting requirement, providing identifiers and validated reference data associated with the entities will also provide important risk management benefits for the financial industry,” said Michael Bodson, DTCC president and chief executive, in a statement.

The CICI is designed to be an identifier for all legal entities dealing in OTC derivatives falling under CFTC jurisdiction until an international program for a Legal Entity Identifier is launched, which is expected by March 2013.

DTCC, the post-trade group, and Swift, an industry-owned co-operative that provides a secure electronic messaging system between banks, are also working with the Association of National Numbering Agencies (Anna) to incorporate National Numbering Agencies as federated registration and validation facilities.

A federated operating model has been recommended by the Financial Stability Board (FSB), the G20’s regulator, to the G20 nations.

DTCC, Swift, Anna and ISO had previously been recommended by a broad group of industry trade associations, and will work together to adapt this industry solution for the global regulatory community under the governance framework and operating model being proposed for the global LEI program by the FSB.

“The best route to mitigate regulatory risk is for the institutions themselves to group together to come up with the solutions the regulators and the industry needs,” said Brian Sentance, chief executive of analytic and data provider Xenomorph. “Financial markets are a very complex system, and rules will only force that system to behave in new and not entirely expected ways.”

The CFTC said that CICI provided by DTCC-Swift is the only available identifier that satisfies all requirements of the Commission’s swap data reporting rules, and can be provided to market participants sufficiently in advance of the initial compliance date for swap data reporting to enable compliance with the rules.

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