LEIs in Midst of Identity Crisis
The capital markets industry is wrestling with how to come up with a system of legal entity identifiers (LEIs), which are mandated at both national and global level.
One of the more intractable issues appears to be coming up with a unique identifier that will work across all asset classes and firms.
The Commodity Futures Trading Commission, a U.S. regulator, has instigated a provisional LEI, called the CFTC’s Interim Compliant Identifiers, or CICI, which is designed to be an identifier for all legal entities dealing in OTC derivatives falling under CFTC jurisdiction and which the CFTC hopes will morph seamlessly into a future global LEI system.
“In the U.S., Dodd-Frank mandated initiatives to create standard legal entity identifiers and other countries have also recognized their importance,” said Jess Haberman, director of compliance at Fidessa, a trading technology firm. “Implementation efforts are well under way to come up with a standard identification system for financial counterparties.”
An LEI is a 20-digit numeric or alphanumeric code, which would identify a firm by its name, address and jurisdiction but would not contain any embedded intelligence.
The Financial Stability Board, the G20’s regulatory body, recommends a three-tier structure for the global LEI system: a regulatory oversight committee, a central operating unit and a local operating unit. The FSB wants to introduce a global LEI program by March 2013 so as to help watchdogs across the globe better monitor systemic risk.
“We see buy and sell sides becoming increasingly challenged by the need to plan for, resource and, of course, meet their requirements around counterparty risk, KYC [know your customer] and generally ‘good business’ practices that relate to maintaining databases of clients, counterparties and issuers,” said James Redfern, managing director of CounterpartyLink, a provider of legal entity information on financial firms.
“We are having more discussions around the need for accurate, timely and compliant legal entity data,” he said.
CICI is essentially a global LEI utility, but focused solely on the entities that trade interest rate swaps and credit default swaps at present.
The system of global LEIs that is contemplated by the FSB would be in addition to CICI and other initiatives at the national level that require identifiers, most notably a consolidated audit trail, or CAT.
The Securities and Exchange Commission has delegated to the Financial Industry Regulatory Authority (Finra), Wall Street’s self-regulator, and other self-regulatory organizations the task of creating a CAT, and has also contracted with Tradeworx, a high-frequency trading firm, to provide real-time information.
Rule 613 under Regulation NMS requires that exchanges and self-regulatory organizations submit to the SEC by April 26, 2013 a plan to create, implement and maintain a CAT.
A central repository available to all regulators will include all events in the lifecycle of an order form receipt or origination through execution or cancellation. The rule requires identity of account holder and persons authorized to trade for an account.
“It is interesting to consider what indirect effect the global LEI system may have on the consolidated audit trail initiative, which may require every investor to be uniquely identified,” said Haberman of Fidessa. “Self-regulatory organizations are currently working on a plan for the consolidated audit trail that is to be submitted to the SEC by April 2013, and LEIs could play a part.”
Currently, there is no single database of comprehensive and readily accessible data regarding orders and executions.
Instead, each self-regulatory organization uses its own separate audit trail system to track information relating to orders in its respective markets.
Finra operates the Order Audit Trail System (OATS), an integrated audit trail of order, quote and trade information for Nasdaq and over-the-counter equity securities.
Finra uses this audit trail system to recreate events in the life cycle of orders and more completely monitor the trading practices of member firms, who are required to develop a means for electronically capturing and reporting to OATS specific data elements related to the handling or execution of orders.
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