Get Ready for Universal Entity Identification

When a data manager tells you the IT department has already been warned that the implementation of a new business entity identifier might have to be included on the development agenda, it is clear times are changing. There has been talk about a universal business entity identifier for years, but the market has never really managed to agree on an acceptable global standard. Some years back there also seemed to be little optimism that this would happen anytime soon. It is only now that it is actually getting exciting, as the US Treasury’s Office of Financial Research has launched a legal entity identifier consultation process and market participants say we are close to solving this problem once and for all.

At the ISITC Europe conference in London in November, 68% of conference-goers said a globally acceptable business entity identifier is achievable in two to five years. Panelists said that a few years ago they might have voted that it would never be possible to achieve this, but today it is a different story.

Following the financial crisis, there appears to be increased regulatory co-operation across borders, and a growing focus on data standards. In fact, there is a sense that there will be co-operation in terms of which identifier regulators will support, potentially in terms of requiring firms to use the same identifier for identifying business entities for transaction reporting.

The question now is where we go from here. London-based Nik Whitfield, head of investment banking at data consultancy and technology firm Detica, says: “The practicalities of making it happen are not trivial.” If regulators do get involved and help the industry agree on a business entity identifier, a range of issues still need to be dealt with relating to the implementation and operational model.

The first challenge is the scope. From the get-go, some say a universal identifier will have to cover all entities firms have in their systems. This means even if the identifier is built on an existing standard, there may be a need to extend that standard to ensure sufficient coverage. This is what Swift is working on at the moment—extending the scope of the BIC standard, which has been proposed as a potential universal entity identifier, to cover all parties involved in financial transactions.

It is still up for discussion what should be within the scope of a universal identifier from the very beginning. “We have to make sure the coverage is comprehensive before regulators enforce adoption of a standard,” says London-based Martin Sexton, consultant, London Market Systems, adding that it is also a must to have a timely allocation mechanism “as the chance of even 80% coverage of business entities on day one is extremely unlikely.”

Talks about scope have been ongoing for years, with some saying it is better to start small. ISO Working Group 8, focusing on business entity identification, agreed to limit the scope of the proposed International Business Entity Identifier, which failed to pass the ISO process. The identifier that group is working on has since been dubbed the IGI, the issuer and guarantor identifier.

However, if the use of a universal business entity identifier becomes a regulatory requirement, it may have to start big. London-based Marcelle von Wendland, vice-president at enterprise data management software company Fincore, says any entity should have the right to get an identifier. “All entities should be able to register, or be forced to register by regulators,” she says.

The Funds Challenge

Funds have long been recognized as entity types in need of an identifier. In 2007, Swift reported the organization was working on a project aimed at assigning identifiers to funds, initially on the retail side, and later for institutional funds. At that time, Swift told Inside Reference Data that the project, dubbed Civic for collateral investment vehicle identifier codes, would result in 40,000 codes being assigned the following year. But the plans changed in 2008, and Swift then said Civic codes would instead be assigned to specific funds customers wanted Swift to be able to identify in the context of financial messaging (Inside Reference Data, July 2008).

For the purpose of a universal entity identifier, the fund coverage may be more in line with Swift’s initial plans. “We parked the Civic initiative, but what was going to be covered in that would potentially be within the scope of BIC as a legal entity identifier,” says London-based Richard Young, manager, industry programs, Swift.

Still, funds is one of the areas market participants suggest could become a challenge, as they are not necessarily registered and there may be no publicly available information sources. Reference data expert Penny Davenport says the mapping process at the fund-level could be hard work. “If there was a code and a registration document, we could point to that and say these two funds are the same entity, but there may not be a publicly available registration document,” she says.

Fund managers will often identify a strategy with a code internally. They may not even acknowledge that a strategy exists, says Davenport, explaining that this may happen in the event that a fund manager is managing money on behalf of a family, for example. “That’s going to be extremely challenging to identify,” she says.

The lack of publicly available data on certain entities is also one of the questions Toronto-based Ken Price, chief executive of counterparty data vendor Avox, has been getting from the community. He says the discussion should perhaps be about whether firms should be trading with companies that are not willing to publicly disclose their complete legal name and the jurisdiction in which they are registered. For the purpose of cross referencing a universal identifier, he explains that the non-transparent funds cannot be included as their basic information is not publicly accessible, but fund managers are likely to be covered. “We work with our clients’ entities of interest,” says Price, who estimates that this means around 2.1 million entities will have to be covered by the scheme.

Going Global

With the global nature of the market, this figure includes international entities, and the operating model will also have to work around the world. “We need an organization that already has a global mandate to administer the identifier,” says von Wendland.

The global nature of the industry means the geographic reach is typically listed as a number one requirement for a standard. “If the identifier is not global, it will not work,” says London-based Julia Sutton, director, customer data services, RBC Capital Markets.

A variety of groups has worked on creating an entity identifier for many years, and most firms will also have their own internal identifiers. There is a cost associated with implementing an identifier, and there have previously been concerns about new standards becoming ‘just another standard’ to map to.

In addition, the operational model behind a standard has been a much-debated topic. The administration of an identifier and the operational requirements that would go with it can be seen as a significant undertaking, and it has been suggested there may be a need for several organizations to team-up to make it happen. UK-based independent consultant Hugh Cowell, who worked on the business entity identification proposition from 2004–2006 as part of the Reference Data User Group, says it has previously become clear that no single organization can do this on their own. “No one party had the will, the authority, the size or the ability [to do it],” he says.

Cowell says one of the conclusions he drew from the earlier work on this was that the introductory phase of the project would never end. “There would always be a new geography to load, a new class of entity to load, a new angle on a piece of entity data, and a new change in the

landscape happening,” he says. If a universal identifier is now introduced, the organization—or organizations—responsible for making it happen, will have to ensure processes are in place to deal with these challenges.

For the identification scheme to work, the market needs to be certain the data is accurate, and that changes are communicated in a timely manner. Whitfield says there would have to be a robust data management process. “If an identifier changes, all participants would need to be informed at the same time,” he says. There has to be a system that allows all market participants to receive these changes at the same time. “If one bank receives the change an hour late, that bank may experience breaks in the downstream process,” says Whitfield, who adds that the identification system has to be fair.

The Case for EDM

If regulators force firms to adopt an entity identifier, they will also have to accommodate for the fact that there are significant differences between banks in terms of data management maturity. “If you do EDM well, it will benefit the organization,” says Whitfield.

Firms that already operate with a golden copy of entity data should quite easily be able to map in another field. RBC’s Sutton says firms are likely to first map the new identifier to their internal identifier. Data that is being sent to external parties will take the field with the new identifier. As and when new systems are being introduced, the new identifier can become the primary key in these systems too.

The different stages of maturity also mean any forced implementation must take into account that the mapping time will vary from firm to firm. “I think firms that have a golden copy will be able to adopt it quickly,” says Sutton, adding that those that do not have this in place yet will have a much bigger job on their hands. At RBC, IT has already been put on alert, and the teams have discussed impact on transaction reporting. “It will just be a case of swapping one identifier for the other,” she says.

It all comes back to data governance and centralization. “Firms that have good data governance and data management around counterparty data will find it easier to implement a new identifier,” says Whitfield.

These firms are also likely to be the early adopters. “I will adopt it immediately, and I don’t see any drawbacks with having it,” says Sutton, who suggests it would be sensible if a core group of users agree to adopt the new identifier to drive implementation. Counterparty vendor Avox, now part of the Depository Trust & Clearing Corporation, has built up a community of banks that share counterparty data. Sutton says this group could be a good place to start as it would be easy for these institutions to add the new identifier if provided as a field by Avox.

Firms that already have a link-up with a counterparty data provider such as Avox, can more easily add in the extra field. “All our clients are future-proofed,” says Avox’s Price. Avox cross-references new identifiers with its proprietary identification system, adds them to its data feed, and this way does some of the work firms that do not take counterparty data from an external provider would have to do internally. “We will certainly be carrying the standard the industry decides to go with,” he says

There is a sense in the market that there will soon be more clarity on what this standard will look like. In the US, rules are being drafted on the back of the Wall Street Reform Act, and there are similar activities in Europe. Swift’s Young says regulators will require an entity identifier for OTC derivatives reporting, and these requirements are likely to drive an announcement on the standard. “The idea is that some of this will be up and running by 2012,” he says.

When it is up and running, this will for many be a highlight of their careers. It will prove that there was a reason to start this discussion more than a decade ago, and that it is possible to make a difference. Operational challenges may well need to be addressed, but that does not mean the problems are unsolvable.