Global Regulatory Body Outlines Three-Tier ID System for Business Entities
The Financial Stability Board has made it loud and clear: it doesn't want a centralized organization but a "federated approach" to how the global financial market will come up with new alphanumeric identification codes for firms trading securities and financial contracts.
On Friday, the FSB, a body created by the G20 and mandated to prepare recommendations for the appropriate framework to govern the so-called legal entity identifiers (LEIs), disclosed a three-tier structure which calls for the creation of a logically centralized database of identifiers and corresponding reference data that relies on different systems across the global and linked by a central technology platform. The FSB is expected to win approval to move forward with the LEI's infrastructure at the next G20 meeting in Mexico later this month. Next up: creating an LEI implementation group to set the LEI system in place by March 2013.
The 20-digit alphanumeric LEI would replace the hodgepodge of proprietary and third-party codes used by financial firms to identify themselves so regulators can get a better handle on systemic risk. The LEI would be linked to reference data about each firm which would include the official name of the entity; its headquarters and other identifying information. Financial firms dealing in swap contracts have been targeted as the first to be assigned LEIs.
In a report entitled "A Global Legal Entity Identifier for Financial Markets: FSB Report to the G20", the FSB it outlines the framework as follows: overall responsibility for LEI governance would fail to a Regulatory Oversight Committee while a Central Operating Unit (COU) would create and maintain a database of the LEIs. Local Operating Units (LOUs) would be responsible for registering legal entities to receive the 20 character codes whose goal is to help regulators monitor systemic risk.
Calling the COU, the "pivotal arm of the global LEI", the FSB says it would be responsible for applying uniform global operational standards and protocols and the methods by which local systems can connect to the COU. The COU, a not-for-profit organization, would recommend whether to outsource or develop in-house any particular function or operation of the global LEI system. The LOUs would offer local registration, validation and maintenance of reference data and protect information that must be stored locally.
The FSB's recent outline follows a statement saying it wanted to take a federated approach to an LEI infrastructure and requesting the International Organization for Standardization back out from overseeing a registration authority for the LEIs. That registration authority was supposed to be SWIFT, which was tapped by a global group of securities professionals led by the Securities Industry and Financial Markets Association along with the Depository Trust & Clearing Corp. and Association of National Numbering Agencies to create a global LEI utility. It was never clear just what ANNA's role would be, but the DTCC and SWIFT would actually create and distribute the LEIs for financial firms which applied for the ID codes.
It now remains to be seen how DTCC, SWIFT and ANNA will fit into the three-tier model now that the FSB has vetoed a centralized LEI organization. The DTCC could vie for the role of COU. In a recent white paper on ID standards, North America's national numbering agency CUSIP Global Services suggested it wanted to play a role in a global LEI system as a local registration or operating unit.
New York and London-based risk management consultancy Financial Intergroup, which has been lobbying the FSB and regulators to take a federated approach to the LEI infrastructure, also wants to claim its stake in the LEI infrastructure; it has come up with a version of a federated operating model in which the governance and operation of a global ID system would be shared between the financial industry and governments.
"The FSB's statement on a going forward framework for the LEI initiative reaffirms both their seriousness and their diligence in confronting one of the most serious gaps in the global system's infrastructure. My firm and the group of global technology leaders and other stakeholders that we have assembled for accommodating the FSB's LEI requirements look forward to working collaboratively with all stakeholders towards a successful first implementation of a global identification system for financial market participants," says Allan Grody, Financial InterGroup's president in a statement issued to www.iss-mag.com on Friday. A brief explanation of the model can be found in an article co-authored by Financial InterGroup on www.iss-mag.com on March 15 entitled: "Identifying Legal Entities: A New Global Alternative."
Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com)