A new system requiring standardized IDs for financial institutions will finally start to take shape in 2012, with new details slated to be announced in January by the Geneva-based International Organization for Standardization (ISO).
In January, the ISO will publish a standard for the proposed Legal Entity Identifier (LEI), giving the world its first look at a new system that promises greater transparency while affecting every trade that’s made.
The financial crisis of 2008 made it clear regulators needed a better system for gauging systemic risk, given the interconnectedness of counterparties. The U.S. Treasury Department’s Office of Financial Research launched the concept of LEI last year, and with the industry firmly behind the idea, a new LEI system could be ready in 2012.
Under the current proposal, an LEI will be a unique ID consisting of 20 alphanumeric characters. Each LEI will be associated with a single corporate entity. That way, firms will be able to keep track of their counterparties and regulators will be able to keep tabs on firms and the types of risks that exist in the financial system.
Though the United States has provided much of the leadership behind a global LEI system, the general concept enjoys broad support, including from the G-20, which reaffirmed its commitment in October.
Much progress has been made over the past year, including the decision that the Society for Worldwide Interbank Financial Telecommunications (SWIFT) will be the registering authority for LEIs.
The U.S. is determined to mandate LEIs for all domestic institutions and for any entity that does business in the U.S. or with a U.S. institution. Other countries are considering similar mandates, and if LEIs are required in the Eurozone and in key Asia-Pacific markets, there will be few barriers left to the system becoming truly universal.
While the ISO will not be releasing many of the details surrounding LEIs until January, and some matters aren’t likely to get hammered out until later in the year, there are things firms can do now to prepare for the coming LEI regime.
“One thing that they’ll need to do is get their own house in order,” said Steve Engdahl, senior vice president of product strategy for the data management firm GoldenSource. “The process of adoption becomes easier if you know where your data is today.”
Firms can start now trying to clean up and consolidate their data, placing it in a virtual “warehouse,” according to Engdahl. They also might want to make sure internal systems can operate in the language they already use, with the LEI being a compatible add-on. That way, the conversion to an LEI system will be as smooth as possible.
Ultimately, firms will need to develop a platform for risk analysis that takes into account all the transactions that they’re processing, Engdahl said. While regulators are looking at systemic risk, institutions will want to use LEIs to determine their exposure to certain counterparties.
“A lot of institutions learned through the crisis that they didn’t have everything they needed to really answer questions about their exposure quickly and correctly,” Engdahl said. “Having an identifying nomenclature will make it easier to communicate across departments and look at exposure to a particular counterparty.”
LEIs have the potential to improve the quality of risk management and make it easier to get prompt answers in a volatile market. People in the industry hope the new system will ultimately lead to better decisions about the risks firms take on, in addition to giving regulators the information they need for improved surveillance.
