Legal Entity Identifier News: July 2019 Update

Global Legal Entity Identifier Foundation provides an overview of the latest global developments relevant to Legal Entity Identifier adoption

---

---

To make it easy for stakeholders to follow developments relevant to Legal Entity Identifier (LEI) rollout around the world, the Global Legal Entity Identifier Foundation (GLEIF) provides related updates via its blog.

This post summarizes LEI news tracked within English language sources since January 2019. Sources cited in this blog are included in the ‘related links’ below.

The role of the LEI in enabling an automated and digitized global economy

In this edition we focus on the LEI’s position as a unique, international and open entity identification standard and how its broad adoption will enable the potential for further automation and digitization of financial and commercial transactions. Indeed, as the global economy navigates the path of digital transformation, verifying the identity of customers, partners and suppliers, remains a time-consuming, costly, yet business-critical challenge. The ability to correctly identify transaction partners and mitigate risk, regardless of sector, is key to business success. This is why a standardized, cross-border approach to entity identification, such as that provided by the LEI, is so important. It can deliver significant advantages – such as transparency, efficiencies and enhanced risk management possibilities - to all participants within the digital marketplace. If the LEI is integrated into entity verification methods, including solutions based on digital certificates and Blockchain technology, any party can easily connect all records associated with an organization, and identify who owns whom. By becoming the common link, the LEI will provide certainty of identity in any online interaction, making it easier for everyone to participate in the global digital marketplace.

An important first step in revolutionizing the process of publishing, accessing and aggregating trusted digital financial information was reported in a GLEIF press release dated May 2019, which announced that GLEIF’s 2018 annual report in Inline XBRL became the first financial statement ever to embed an LEI. As a result, it became the first official business report globally which automatically links the filing entity to its verified LEI reference data held within the Global LEI Index. Such a simple action can generate significant industry-wide benefits, including trust, enhanced data check methods and reduced fraud. This development demonstrates a tangible way in which LEIs support the global digital economy. Further examples are summarized in the blog post below.

Growing recognition of the LEI’s significant contribution to progress in data standardization

The potential industry-wide gains associated with automated and digitized financial and commercial transactions cannot be realized without an underlying standardized infrastructure. There has been widespread recognition both for the role the LEI plays in advancing data standardization efforts globally and the positive impact this development is having on efficiency gains and reductions in costs and risk.

• Data Foundation acknowledges role of LEI in open data progress in ‘The State of the Union of Open Data’ report
  
  In January 2019, the Data Foundation published its annual ‘The State of the Union of Open Data’ report, in collaboration with Grant Thornton Public Sector. The U.S. focused Data Foundation seeks to define an open future for its government and society’s data; it explains that the term ‘open data’ relates to an idea that information should be both electronically-standardized and freely available. In its annual report, the Data Foundation emphasizes that open data has “taken hold in the U.S. government and American society [...] public-sector leaders, civil-society advocates, and the technology industry have worked together to liberate information from outdated document-based storage and siloed systems by applying the two basic steps of open data: first standardization and, second, broader sharing.” The report acknowledges “significant progress” in each of the three key areas related to open data – standardization, sharing and use. In particular, 83.9% of open data leaders interviewed reported progress with standardization in 2018, and when acknowledging this, some respondents “cited the adoption of LEI [...] Hewing to a single standard for identifying corporations and other entities has lifted a huge amount of administrative overhead from organizations now using the LEI.”

• RegTech Data Summit: Industry alignment on need for open data standards
  
  The websites of both Channel Futures (a media outlet focused on the digital services revolution) and the Global Association of Risk Professionals (GARP) have recently carried articles summarizing a panel discussion on open standards at RegTech Data Summit, hosted in New York in April. GARPS’ article, titled ‘No Dissent on Data Standardization’ suggested that the panelists and attendees of the event were unified in agreement that “data standardization and open data architecture – which supports interoperability among information systems of the government and the private sector – hold tremendous promise for the financial industry. Firms can streamline their regulatory compliance, better manage risk, improve efficiency and, over time, reduce operating costs.” It further explained that some panelists advocated support for the Financial Transparency Act, a bill introduced in Congress in 2017, calling for “standards with respect to format, searchability, and transparency” in regulatory agencies' collection of data under securities, commodities and banking laws.
  
  One of these advocates on the panel was Robin Doyle, managing director, Office of Regulatory Affairs, JPMorgan Chase & Co, and member of the GLEIF Board of Directors. She comments: “The absence of a standard is a big waste of time and prevents you from doing in-depth analysis.” In the Channel Futures article, titled ‘Open Standards Pushed as Security Fix for Financial Sector’, she elaborates further: “Open standards would help find criminal activity and financing for terrorists. Criminals don’t commit all their crimes at one bank. They spread them out across several banks so they are better hidden [...] We need ways to see that activity across institutions and open standards could do that.”
  
  Also on the panel, according to GARP, was Karla McKenna, head of standards at GLEIF who “emphasized that adopting standards ultimately reduces costs and risks and improves transaction efficiency.” She argued that the same data used in business should also be used in reports to regulators, to facilitate the analysis of industry-wide trends.

• FSB Report on Market Fragmentation

  
  The Financial Stability Board’s (FSB) ‘Report on Market Fragmentation’, published in June 2019, highlights that significant differences in data reporting requirements can, in the extreme, lead to market fragmentation and have the potential to impair data quality, usability and ease of aggregation.
  
  The report continues by acknowledging that work “is currently taking place to achieve greater international standardisation of reporting, through the [LEI], Unique Product Identifier, Unique Transaction Identifier and other critical data elements.” In Annex E of the report, a summary of discussions within a FSB workshop, held in cooperation with the International Organization of Securities Commissions (IOSCO) in January 2019, notes that participants discussed the need to make further progress on standardization of data reporting to provide better systems monitoring by authorities at lower cost to financial institutions. It states that while progress has been made in harmonizing standards for data fields by standard-setters e.g. the LEI, more work is needed to implement the standards to obtain comparability of information to allow data aggregation and to streamline reporting processes. It concludes by noting that the use of artificial intelligence and big data will become relevant and usable for the identification of risks when harmonized reporting standards are achieved.

LEI and blockchain: Blockchain-based fintech advanced by LEIs and how together they can improve workplace artificial intelligence

The growth of an increasingly automated, digital global economy is being driven by innovations in financial technology. The significance of a global, harmonized identity for all companies in the success of blockchain fintech is explored in an insight article on Development Asia, the Asian Development Bank's knowledge collaboration platform. The article considers how the potential of blockchain fintech to solve persistent problems – such as transparency and financial inclusion – has been much hyped, while the basic infrastructure is lacking. It points to a number of initiatives needed to bring blockchain closer to the hype; one of which is the LEI as a standardized means of identifying companies, internationally. It summarizes: “Without reliable identifiers, the huge pool of metadata that blockchain fintech promises may be impossible to navigate. GLEIF provides an essential piece of infrastructure for the future economy; it helps to advance blockchain fintech to a stage where it can have meaningful benefits for society.”

Remaining on the theme of LEI and blockchain, the LEI’s role in workplace artificial intelligence (AI) is explored in an article by AI Business, entitled, ‘How Blockchain And Legal Entity Identifiers Are Improving Workplace AI’. The article states that “Blockchain-based LEI systems make it infinitely more difficult—if not outright impossible—to perpetrate common forms of financial fraud [...].” It also notes that the “advanced analytics for which workplace AI is renowned depends upon copious data volumes, optimization by a range of sources, and successful data integrations.” The article concludes that implementing “LEI systems on blockchain platforms not only helps to democratize access to these legal identifiers, but also serves as an expeditious data integration platform for holistic understanding of customers and legal entities. As such, this approach is an excellent means of integrating data for advanced machine learning analytics for understanding customers, calculating risks, and even devising new products or services to offer them. It’s just one of the ways Blockchain can create more effective AI.”

LEI: Multiple opportunities recognized, including risk management, compliance automation and seamless multichannel device authentication

The opportunities associated with broad LEI adoption are manifold. In an article published on Securities Lending Times in May 2019, Martin Walker, head of product management for securities finance and collateral management at Broadridge, outlines the challenges for regulators, central banks and governments when managing systemic risk. He makes the case that opportunities created by using LEIs and Unique Transaction Identifiers should be embraced. “Not only are they essential to support effective regulatory reporting but they could also provide a great value for market participants [...] Embracing the LEI as a standard way to identify counterparties across both internal systems / departments and the market will ultimately lead to reduced cost and risk.”

A blog published in June 2019 on A-Team Insight, a knowledge platform for the financial technology industry, mentions the LEI in relation to aiding regulatory technology (RegTech) in automation. “RegTech has a key part to play in automating compliance [...] automation can support Know Your Customer (KYC), due diligence, AML [anti-money laundering] obligations and sanctions screening, making it simpler, quicker and easier to onboard a client and providing information necessary to deciding whether or not to do business with a particular individual or entity. The Legal Entity Identifier (LEI) will also help here, while ongoing adoption of RegTech, machine learning and artificial intelligence will further automation.”

Finally, in a ‘Deep Dive’ feature on multichannel authentication for consumers, PYMTS.com explores how the LEI could help to build consistent digital ID experiences as consumer ownership of multiple connected devices increases. It states that, “as consumers add devices to their repertoires, they are more likely to be required to authenticate their identities, even with familiar businesses. Such frictions could disrupt transactions between merchants and returning customers using new devices.” To combat this, the article suggests greater adoption of LEIs would verify identities on both sides.

Bank of England continues LEI endorsement, to benefit businesses and wider economy

In June 2019, as covered by Euronews website, the Bank of England’s (BoE) Governor, Mark Carney announced that it would consult on developing an open platform for competitive financing to plug a £22 million funding gap for small and medium sized enterprises (SMEs). He said: “Part of the problem is that the assets that SMEs are seeking to borrow against are increasingly intangible – like a brand or user base – rather than physical machinery or buildings […] this should not be the case in a data-rich world. Lenders should be able to access a broader set of information on which to base credit decisions,” The BoE suggested that SMEs could create a ‘portable credit file’ which could be shared with lenders through a national SME financing platform. According to the BoE, the identification of business and verification of their data will be crucial to make this work. The BoE noted the LEI system could be adapted for British SMEs for this purpose.

Further BoE support for the LEI is documented in its ‘New economy, new finance, new Bank’ report published in June 2019. The report asserts that the BoE will adapt so a new financial system can meet the needs of the new economy. It recognizes the changing nature of commerce, driven by technologies shaping a new economy and the report states that the BoE will “champion the LEI as a globally recognised and unique identifier for all businesses in the UK, including integrating the LEI in the Bank’s new real-time gross settlement (RTGS) service and mandating its use in payment messages.” It also highlights that identification of businesses and verification of their data is “crucial” to making an ‘Open Finance’ system work. “If adopted widely,” the document states, “the LEI could vastly increase the value of data for companies. Its potential is further enhanced by virtue of being a global standard, endorsed by the G20 group of Governments and recognised across the world. Building a globally recognised and unique corporate identifier into this vision for ‘Open Finance’ would enable businesses to move around the financial system seamlessly. They could pull their data together under a single identity, into a portable credit file to shop around for the finance they need. And because of global recognition, it will help businesses access finance for cross-border trade”

The BoE’s support for LEIs was further reinforced in a keynote speech given by Sir David Ramsden, deputy governor for markets and banking at the BoE, in May 2019 at the Association for Financial Markets in Europe 12th annual European post-trade conference in London. According to a summary of his speech on Markets Media, he suggested that in order to improve messaging, the BoE wants to make LEIs a mandatory component of settlement messages between financial institutions. Sir Ramsden is quoted: “We can see great value in also extending use of LEIs to a wider range of transactions in the longer term. As well as being a valuable financial reporting tool, we believe the LEI could be a building block for further innovation, delivering wider economic benefits for end users of financial services – increased usage could raise efficiency, competition and productivity.” He also explained that LEIs could possibly be used for more than just transaction reporting and be more useful for end-users. He referenced the open finance platform as an illustration.

---