Regulators Back LEIs

Terry Flanagan

Implementation efforts to expand during 2012.

International regulators have given their blessing to a mechanism for reporting OTC transaction data to trade repositories, and for aggregating transactions using legal entity identifiers (LEIs).

The Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) have issued recommendations on minimum data reporting requirements, access to data by regulators, LEI development, continued international consultation regarding implementation of LEIs, and development of an international product classification system for OTC derivatives.

The recommendations address the Financial Stability Board’s call for minimum data reporting requirements and standardized formats, and for a methodology and mechanism for aggregation of data on a global basis. The FSB is a working group led by representatives of CPOSS and IOSCO that’s charged with implementing the G20 reforms for OTC derivatives.

The G20 leaders, at their Nov. 2011 meeting, declared support for the creation of global LEI and called upon the FSB to take the lead in coordinating work among the regulatory community.

In response to this mandate, at its Dec. 2011 meeting the FSB created an ad hoc expert group of authorities to carry forward work on outstanding issues relevant to implementation of a global LEI.

The CPSS/IOSCO recommendations notes current industry efforts toward creation of an LEI system, and recommends that trade repositories actively participate in LEI development.

The recommendations also call for development of a standard international product classification scheme for OTC products, and calls for coordination by financial and data experts drawn from both regulators and industry toward this objective.

The private sector has responded to calls by international regulators for an effective infrastructure for OTC trade repositories.

Not only has it established repositories for credit, interest rate, and equity derivatives, but it’s also working to develop a system of LEIs, Unique Product Identifiers (UPIs), and taxonomies for the classification of OTC derivatives, according to the International Swaps and Derivatives Association.

ISDA has launched initiatives to ensure recording of OTC derivatives at the global level for four major asset classes: interest rate derivatives, equity derivatives, credit derivatives and oil derivatives.

The Trade Information Warehouse and the Equity Derivatives Reporting Repository, operated by subsidiaries of Depository Trust and Clearing Corp. (DTCC), currently collect data on credit derivatives and equity derivatives, with reporting done by the G14 dealers.

ISDA selected DTCC in March 2011 to develop a repository serving the OTC interest rate derivatives markets, and chose DTCC Deriv/SERV and EFETnet to develop a commodity derivatives trade repository, to be operational in the first quarter of 2012.

ISDA advocated the use of a single “Counterparty Exposure Repository” to provide for an aggregated risk view for regulators.

ISDA noted that the CPSS/IOSCO is correct in identifying a gap in trade repository reporting, in that repositories were designed for transactional level reporting and not portfolio level reporting.

The report is also correct in highlighting that in order to understand exposure properly, this needs to be done across asset classes, hence across repositories, ISDA said.

LEIs can facilitate the calculation of portfolio-level exposure (between pairs of counterparties), rather than having to build up this information by aggregating multiple transactions across multiple repositories.

The Counterparty Exposure Repository would be in place of requiring valuation data or current exposure information on a transaction level, which would represent a “computationally intensive and technically difficult task,” said ISDA.

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