Handicapping Players in the Land of New Business IDs
Has the job of assigning and distributing new codes identifying U.S. financial firms to regulators turned into a three-way horse race or a collaborative effort?
Rhetoric and reality don't seem to match up, according to a dozen data management experts from some of the U.S. largest financial firms who agreed to speak with www.iss-mag.com on the condition of anonymity.
The contenders for the task -- CUSIP Global Services as a member of the Association of National Numbering Agencies; Depository Trust & Clearing Corp. in conjunction with SWIFT; and Financial InterGroup which has its own model issued statements to www.iss-mag this week espousing collaboration, not competition. But that's not how data management executives view their relationship. "Each wants the upper hand in the process and it's become a competitive battle," says one data manager who spoke on condition of anonymity.
The stakes are pretty high: regulators want financial firms to identify themselves using the new twenty-digit alphanumeric codes rather than a hodgepodge of IDs so they better monitor systemic risk. The Financial Stability Board has given them until March 2013 to devise a global infrastructure for how to do so relying on a twenty alphanumeric code approved by the International Organization for Standardization, the influential global standards body.
The latest salvo in the race, which began two years ago, came on July 2 when the board of trustees of CUSIP Global Services, publicly endorsed North America's national numbering agency as the best qualified for the task of assigning LEIs in the U.S. market. On July 4, the Association of National Numbering Agencies, the global trade group for over 100 national numbering agencies, appeared to echo that sentiment in a statement which didn't explicitly cite CUSIP Global Services but did tout the merits of ANNA's national numbering agencies playing a role in the so-called LEI initiative.
Although OFR was the first regulatory body to come up with the notion that financial firms needed to rely on LEIs, the Financial Stability Board quickly embraced the idea making it a global cause celebre. Last month, the FSB proposed to the G20 industrialized nations a three-tier plan which calls for a global oversight committee, a centralized operating unit to ensure consistent standards for LEI issuance and local operating ts in each country to do the work.
That plan stood in sharp contrast to a more centralized business model unveiled last year by a group of industry trade organizations led by the Securities Industry and Financial Markets Association. That group which calls itself the Global Financial Markets Association endorsed DTCC and SWIFT as partners and gave a rather non-descript role to the ANNA as part of the dream team. With the FSB now weighing in with its two cents, the GFMA has changed its tune to show lukewarm support for a federated model as long as local operating units meet uniform standards. It is calling its new perspective a "hybrid" approach.
In fact, in a statement issued earlier this week to www.iss-mag.com, the GFMA insists it has "always supported a federated framework" that uses a "central utility [operated by DTCC and SWIFT] in partnership with ANNA and local numbering agencies. Likewise, a statement offered up by DTCC cites the "contribution that can be made from national numbering agencies, like CUSIP Global Services." North America's numbering agency, says that the LEI initiative is such a major global undertaking that "collaboration between multiple parties, including the national numbering agencies is the best path forward."
Here is how the contenders stack up based on interviews with about a dozen data management specialists contacted by www.iss-mag.com this week and comments made by the players themselves.
CUSIP Global Services: North America's national numbering agency is clearly counting on its expertise in dishing out identifiers for U.S. financial instruments agency and has a board of heavy hitting trustees back it. "Given the critical role that CGS and other global NNAs [national numbering agencies] play on uniquely identifying issuers, obligations and securities, the board cannot imagine a successful robust LEI solution without the active collaboration and input from CGS and other key numbering agencies," says Jane Washington, chairperson of CUSIP's board of directors in a statement issued on July 2. Washington is also vice president of trust operations at Wells Fargo.
CGS, operated by S&P Capital IQ under contract to the American Bankers Association, says its proposal combines the federated approach advocated by the FSB with the data checks and security of a proposal advocated by SIFMA and other securities industry organizations. Under CGS's plan national numbering agencies would be responsible for validating the accuracy of data provided by financial firms applying for Lei’s and creating an identification code for each entity. Such a role, say data specialists, appears to place CGS and other numbering agencies smack in the category of a local operating units, or LOUs under the FSB's three-tier plan. ANNA's pronouncement following CGS' also bolsters what had been an initial, albeit weak, attempt by SIFMA and other trade organizations to carve out a role for ANNA. When that role was not clarified, mention of ANNA died down. Until July 4 that is.
DTCC and SWIFT: The industry giants in the post-trade processing market were the early favorites of some influential industry trade organizations way before the FSB disclosed its preference for a federated LEI model. DTCC, the umbrella organization for clearing and settling U.S. securities transactions, can leverage a subsidiary called Avox which provides outsourced counterparty data management services. SWIFT, which operates a popular messaging network for communications on fund transfers and securities transactions, also has some background in issuing IDs known as BICs to financial firms.
Just as important, the marriage of convenience between DTCC and SWIFT has already generated a critical result -- a soon to be launched web portal for financial firms trading swap contracts to seek ID codes. That work was well on its way to being completed even before the Commodity Futures Trading Commission makes its decision as to which organization should be assigned the task. Apparently DTCC and SWIFT think they are shoe-ins for the mandate and several data management experts tell www.iss-mag.com that such a win would easily place them in the catbird's seat when it comes to issuing identification codes for other financial entities. Several data management experts at New York banks say that the combined DTCC and SWIFT could easily serve as either a local registration unit for the U.S. or a global central operating unit.
Financial InterGroup: The firm may seem like a dark horse but it insists it promoted a federated approach to creating and distributing LEIs way before the FSB came up with its stance. In fact, Allan Grody, the president of Financial InterGroup, a New York and London-based risk management and financial industry consultancy, says the securities industry should take up "the collaborative call" to come up with the best approach for a new LEI infrastructure but is pretty quick to promote the merits of his stance over others.
Grody says that the DTCC and SWIFT's role in the LEI initiative is based on a "random ID" scheme which could produce duplicative IDs for the same entity. Instead, in FIG's version of a federated approach for issuing LEIs, each local registration authority issues a preset random range of six digits reflecting the ultimate parent of the firm with another five digits issued by the business entity itself to identify each of its operating units or subsidiaries; the remaining seven would be zeros reserved for expansion along with two check digits.
The code convention espoused by FIG, says Grody, conforms to ISO's approved LEI code convention, which only describes the length of the code and its check digit calculation method. Both the FSB and the CFTC have accepted the ISO convention and in the FIG approach calls for certifying agents to validate LEI information at source and then enter it into the local LEI registries not in a centralized validation and storage facility. The local LEI registries would be federated as a logically centralized global database as is the case with how the World Wide Web now operates.
"Both the DTCC-SWIFT and CGS proposed solutions take a centralized storage approach and an after-the-fact data checking, validation and challenge process as the means to control the quality of the data," says Grody. They are based on a faulty antiquated and costly methodology prevalent for reference data. FIG's approach where LEI data is validated at the source, permits the securities industry to more easily reach the next stage of LEI development. That is the definition of the business hierarchy of ownership, a critical aspect of organizing counterparty identification for risk aggregation, the early objective of this global identification system."
Data management experts who spoke with www.iss-mag.com praised Financial InterGroup's approach as "innovative" but were uncertain as to how well it will be espoused by the securities industry. "The entrenched powers don't typically favor radical change and it might be viewed as a bit too progressive," says one data management director at a New York brokerage firm.
None of the data management specialists polled by www.iss-mag.com were willing to predict who would ultimately win the race to play a role as either a local registration authority or central operating unit. But they were pretty vocal about their frustration on the slow pace of progress and its ramifications for their preparations. "With everything still in flux we are delaying operational initiatives to accept the LEI as a new ID and cross-reference it to other codes," says one data management manager at a New York bank.
Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com)