OFR Speeds Up Legal Entity ID Developments

The Department of the US Treasury’s Office of Financial Research (OFR) has released the “Statement on Legal Entity Identification for Financial Contracts,” an official stance on the need for a universal system for identifying legal entities in the industry, and a call for market participants to take part in the consultation period due to be completed by January 31.

The policy statement directly addresses what has become one of the most established challenges within data management—the lack of a universal system for identifying the legal entities that participate in financial markets has led to the creation of a variety of identifiers aiming to solve the same problem and, in turn, inefficiencies both for firms, regulators and policymakers.

The policy statement specified that if a legal entity identifier (LEI) is established to the satisfaction of the OFR by July 15, 2011, the OFR, in consultation with the chairperson of the Financial Stability Oversight Council, would issue regulation mandating the use of such a standard for data reported to the OFR.

“The Office [of Financial Research] is issuing a statement of policy regarding its preference to adopt through rulemaking a universal standard for identifying parties to financial contracts that is established and implemented by private industry and other relevant stakeholders through a consensus process,” says the document.

London-based Richard Young, manager, industry programs, Swift, says: “We are very encouraged by the consultation process the US Department of the Treasury has initiated. We think they are taking the right approach by looking for an industry consensus and industry-driven solutions here.”

New York-based David Goldberg, head of the enterprise client data management program at BNY Mellon, says: “This major regulatory push for a universal legal entity identifier, is very much consistent with where most of us believe we should be heading as an industry.”

The OFR policy statement says a universal legal entity identifier will be “established and implemented by private industry and other relevant stakeholders through a consensus process,” something Goldberg says he feels is the best and right approach for ensuring this initiative is successful.

The chosen identifier, which the statement says would have to be capable of becoming the single international standard for unique identification of legal entities in the financial sector, is not expected to be a brand new standard. In fact, the statement specifies it would have to be “based on a standard developed and maintained via an international voluntary consensus standards body,” as well as “where possible be compatible with existing systems, work across various platforms and not conflict with other numbering or identification schemes.”

Meanwhile, the commercial issues as well as who would maintain the identifier remain unclear. London-based Paul Kennedy, business manager reference data, Interactive Data, says he expects the feedback to focus on the intellectual property around the use of a legal entity identifier and the commercial model, associated with the entity responsible for creating and distributing it.

What the commercial model is going to look like and how the identifier will be maintained are questions the policy statement has not directly addressed. The document states that the security and reliability of all IT systems involved in identifier issuance and database maintenance and publication must meet or exceed industry standards for real-time, high availability, and “identifiers must be available to the public without fees for storage, access, cross-referencing or redistribution.”

Yet, the operational costs of administering and maintaining the standard will have to be taken into account somehow. “They have set the bar very high, but it is not clear who will take on the costs,” says Kennedy.

There will also be a cost associated with implementing the identifier. London-based PJ Di Giammarino, CEO at regulatory think tank, JWG, says if regulators get this wrong, it could be very expensive for the industry. “One of the concerns from the approach they have taken is that it may be too superficial,” he says. “If the identifier only covers a minimum set of fields and the usage is mandatory, they would have to make sure the use of that identifier is consistent with the legislation on the books now, and do so not only in the US,” but at an international-level.

In fact, market participants continue to emphasize that reaching that global common approach is a must. “It is obviously very important for the OFR that this issue is resolved, but we note that the issue of entity identification also occurs in the parallel rule consultations from the SEC and CFTC,” says Swift’s Young.

In the SEC consultation paper, on “Reporting and Dissemination of Security-Based Swap Information,” and in the CFTC consultation paper, on Swap Data Recordkeeping and Reporting Requirements, entity identification is also mentioned.

The hope is that there will be consistency in terms of standardization in this space. What is needed is a common approach that goes beyond the US, and results in an agreed standard for entity identification that will also be used in, for example, forthcoming EU regulations such as European Market Infrastructure Regulation (EMIR) and the MiFID review, explains Young.

Experts agree that while the OFR policy is domestic, US policy, it has a view to include the international market. “Is the OFR going to become the regulators’ regulator in terms of becoming the super warehouse of data? We don’t know yet, but there is certainly an implication that whatever they do is going to be global,” says Kennedy, adding that while it all starts as a domestically focused regulation, it would have to become global in origin.

Still, this is not set to happen overnight. The timeframe of the consultation and the introduction of an identifier is generally seen to be ambitious. BNY Mellon’s Goldberg says: “I am concerned that the stated timeframe of July 15 is very aggressive and perhaps not achievable to gain an industry-wide consensus.”

Yet, with the right momentum for the initiative, a quick implementation time might be realistic. London-based Darren Marsh, business manager, risk management and compliance services, Interactive Data, says even if the timeframes are not accommodating, if the majority of firms are already using the chosen identifier then the assumption could be that the impact on operational processes would be minimal. “However, firms will want to know if this ID can be used to support global entity reporting requirements or if it will become just another standard to map to,” he adds.

In general, the release of the policy statement is seen as helping to accelerate investment in business entity data programs. “The whole entity identification space is very much under the microscope, and from the industry perspective this brings it even more into focus. Certainly, firms that are now pushing towards standardization will not have to create business cases. The main driver is already there,” says Marsh.