Industry expects regulators to require mandatory legal enmity identifiers as part of reporting rules.

Efforts to define common data formats for OTC derivatives are gathering momentum on a global level, with movement on both the regulatory and private sector fronts.

“There is an intense need among regulators to improve visibility into systemic risk, said Tony Freeman, executive director of industry relations at Omgeo, during a webinar on Tuesday. “Regulators don’t have quality information, which is the impetus for LEI.”

A joint report issued this year by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) recommends the creation of a system of Legal Entity Identifiers (LEIs), continued international consultation regarding implementation of LEIs, and international work to develop an international product classification system for OTC derivatives.

On July 18, the Financial Stability Board noted the progress of financial regulators and industry to establish a single global system for uniquely identifying parties to a financial transaction.

FinReg established the Office of Financial Research (OFR), a division of the U.S. Treasury that’s charged with collecting data to support the Financial Stability Oversight Council.
“Industry and regulators are working together on long-term solutions focusing on a broad implementation across all asset classes, regardless of whether particular transactions are subject to mandatory reporting,” said William Hodash, managing director at Depository Trust & Clearing Corp. (DTCC). “As preparation for the initial phase, the industry anticipates that regulators will require dealers submitting transactions in OTC Derivatives to identify counterparties with the LEI.”

“We expect LEI to be implemented in phases,” said Hodash. “This is a multiphase implementation to not only define legal identities and assign them an LEI but also to later provide parental data linkages to help regulators and financial services firms better map the affiliations between entities that have different numbers, so firms can have a better picture of counterparty exposure.”

During phase one, the industry has asked the solution providers they have recommended to the regulators, including ISO, Swift, ANNA and DTCC to prepare to assign LEIs to OTC Derivatives counterparties.

The International Standards Organization (ISO) may finalize its LEI standard (ISO 17442) on Dec. 14, said Hodash.

DTCC and SWIFT will operate the core LEI utility as the central point for data collection, maintenance, and LEI assignment. This first phase supporting the anticipated OTC derivatives reporting rules will be based on some new functionality added alongside existing capabilities of  DTCC’s subsidiary Avox Ltd.

DTCC will collect requests for new LEIs to be created, validate the information provided using Avox’s capabilities, maintain and store the reference data associated with each LEI, and maintain the public distribution of the LEI database. SWIFT will act as the Registration Authority for the ISO standard, issuing the actual LEI upon the request of DTCC.

“We want to pre-assign as many LEIs for OTC derivatives counterparties as possible, in order to give the industry time to test LEIs in their systems,” said Hodash.  “The LEI Utility will support third-party registration of legal entities, as well as self-registration and validation, and the ability to download the full database.”

“We are aiming to have the enhancements necessary to support these capabilities in place by June 2012, so the OTC derivatives market can meet regulatory reporting requirements without having to retool their internal applications for LEIs,” he said.