Legal Entity Identifier News: May 2017 Update

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

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In February 2017, Data Management Review reiterated in its blog post titled ‘Driving Business Value Out of the Legal Entity Identifier’, the following views which had also been articulated during its related webinar: “The Legal Entity Identifier (LEI) is useful as a unique, unambiguous and persistent entity identifier, but when integrated with other datasets such as securities it can deliver both operational and business benefits.” An audience poll asking what benefits organizations expect to gain from integrating the LEI with other datasets “showed an expectation of significant operational and business benefits.”

Discussing the outcomes of integration, one webinar participant noted the potential to increase the accuracy of risk data aggregation for risk management; support improved due diligence for ‘know-your-customer’ (KYC), client onboarding and anti-money laundering; and later provide strategic marketing information about which entities are driving revenue. It was also pointed out that “by linking the LEI to securities, a clean picture of an entity’s capital structure can be seen”. It would be “critical that organizations building data models include LEIs. This is not about coverage, but adoption of the LEI for value-based use cases.”

The Global Legal Entity Identifier Foundation (GLEIF) fully agrees that broad LEI adoption will empower the wider business community to cut costs, simplify and accelerate operations and gain deeper insight into the global market place. The potential benefits to be generated with the availability of open, standardized and high quality LEI data could grow in line with the rate of LEI adoption. So, our message to businesses around the globe is this: Get an LEI and make it work for you.

To make it easy for stakeholders to follow global developments relevant to LEI rollout, we provide related updates via the GLEIF Blog. This blog post summarizes LEI news tracked since the start of 2017.

Sources cited in this blog are included in the ‘related links’ below.

Africa: Proposed central reporting requirements for over-the-counter derivatives to apply in South Africa

In April 2017, Insurance Gateway reported that the Registrar of Securities Services in South Africa published a further draft Trade Reporting Obligation Board Notice for a second round of public consultation. To transform the over-the-counter (OTC) derivates space, it is important to establish a harmonised reporting framework. This “will provide regulators with the basis to carry out their mandates by having a comprehensive view in order to monitor risks in the OTC derivatives markets. Accordingly, South African Regulators are committed to meeting these objectives”. Through a working group that includes representatives from the South African Reserve Bank, the Financial Services Board and the National Treasury, draft requirements have been proposed to implement the central reporting framework. “The trade reporting obligations notice was first published for public consultation in July 2015 and comments were received but not published during the consultative process in July 2016.” The second draft specifies and defines, among other things, the reportable information and data fields, which includes the use of LEIs, unique trade identifiers (UTI), and unique product identifiers (UPI) that are essential to harmonise reporting requirements. To fast track implementation of trade reporting obligations, “this will be achieved as per timelines proposed in the explanatory memorandum published in July 2016, which proposes the second half of 2017 for implementation”.

Asia: Financial Markets Committee and Bank Negara Malaysia launch second series of initiatives to develop the onshore financial market

In April 2017, Public Now issued a statement by the Financial Markets Committee (FMC) which outlines that the FMC together with Bank Negara Malaysia (BNM) “have been actively monitoring and reviewing the development of the onshore financial market with the aim to further broaden and deepen the markets. The FMC is pleased to announce a number of initiatives that would promote a fair and effective financial market, improve bond market liquidity, ease hedging activities as well as enhance transparency and market information.” To support these initiatives, the “information reporting and settlement infrastructure will be enhanced for greater transparency and to facilitate surveillance on the onshore financial market.” This entails establishing an LEI issuing organization – also referred to as Local Operating Unit (LOU) – to “adopt and manage the LEI. In addition, the applicable reporting system will be enhanced to integrate LEI and facilitate better surveillance under a more liberalised financial market environment.” The initiatives described in the FMC statement were scheduled to take effect on 2 May 2017, while “enhancement to the financial market infrastructure initiative will be implemented on a gradual basis and is expected to be completed over a 12 - 18 months period.”

European Union: European Central Bank proposes building an infrastructure that will allow organizations to automate the delivery of more data, faster and at a lower cost

In the blog post titled ‘The Next Frontier in Data Management Responses to Regulation’ (March 2017), Data Management Review cited Francis Gross, senior advisor to the directorate of general statistics at the European Central Bank (ECB). He noted that “regulators are building ever larger data systems and feeding them with more granular data in near real time. The reasons for this are lessons learnt from the 2008 financial crisis, when data could not be aggregated fast enough to present a clear picture of risk.” Mr Gross added: “We need to see regulators being more courageous and leading in fields such as standardizing the digital representation of entities. Contracts also need to make progress. As reporting requirements increase, the only way to reduce the burden on industry is to build infrastructure that will allow organizations to automate the delivery of more data, faster and at a lower cost.” The LEI, he concluded, “supports this in providing a standard entity identifier. We need to do the same for contracts, then mobilise legislation and reduce the cost of regulatory compliance to a minimum.”

Benoît Cœuré, Member of the Executive Board of the ECB, commented at the third workshop on ‘Setting Global Standards for Granular Data: Sharing the Challenge’ (28 March 2017) that “those jurisdictions which host the largest shares of derivatives activity already require that all counterparties to reportable derivatives transactions have LEIs”. He also pointed out that although “improving the richness of the LEI” by including, for example, relationship data on who owns whom, would be important, “it is arguably even more important to sponsor a more widespread use of the LEI across jurisdictions.” In that respect, the European Union (EU) “is setting a good example, representing around 60 percent of LEIs that have been issued so far, with several regulations referencing the LEI and stipulating its use. Other jurisdictions too should make more use of the LEI, possibly through mandatory adoption in new regulations.”

United States: Office of Financial Research reiterates importance of broad LEI adoption

The U.S. Office of Financial Research (OFR) of the U.S. Department of the Treasury issued several publications in the first months of 2017 highlighting the importance of broad LEI adoption with a view to standardizing the reporting and collection of financial data:

• Promoting Higher Quality and Lower Cost in Financial Regulatory Reporting (January 2017): “Data are the lifeblood of finance, and the volume of financial data is staggering. On a routine day, close to $15 trillion in payments settle across the world, according to a 2016 report that OFR staff helped prepare. Firms depend on data to confirm transactions and manage risk. Regulators need data to oversee firms and markets. High-quality data are essential for both. But data collection is not always smooth or efficient. The U.S. regulatory system is fragmented, so in some cases, firms must report the same information to different regulators in different ways. This inefficient reporting can be costly and undermines quality. (…) The OFR is part of several standardization efforts. (…) Despite convergence toward an identification standard — the LEI — regulators currently require other identifiers. (…) This redundancy and extra cost is why industry groups have called on authorities to universally adopt the LEI.”

• Lessons from the Financial Crisis — Eight Years Later (January 2017): “The 2008 collapse of Lehman Brothers proved the importance of data quality. When Lehman failed, many market participants did not realize they were exposed to Lehman through its subsidiaries. After Lehman’s failure, the industry clamored for a system to precisely identify parties to financial transactions. The OFR delivered by leading a global effort to develop and build the LEI system. (…) The OFR is helping to complete the network by promoting its use among financial regulators and pushing for broader adoption. A key benefit of precise entity identification, like that for financial instruments, is to collect data once for multiple uses, further reducing the regulatory reporting burden.”

• Remarks of OFR Director Richard Berner at the Power of Transparency Speaker Series hosted by the Atlantic Council and Thomson Reuters (January 2017): “Requiring financial firms to report their activities creates transparency that promotes price discovery and efficient markets. (…) Now we have a solution: The global Legal Entity Identifier system, or LEI, is (…) a cornerstone for financial data standards. (…) A half-million LEIs are already in use, but more progress is needed toward universal adoption and the full benefits that we expect to flow from it. (…) Authorities in Europe have required it, but our fellow U.S. regulators have been slower to respond. They need to step up and do more.“

• Breaking Through Barriers Impeding Financial Data Standards (February 2017): “Estimated costs for industry of managing data without common standards runs into the billions of dollars. (…) As the LEI system grows, incentives will likewise grow for industry to make the investment necessary to incorporate the LEI and map the LEI system to their own internal data identification systems.”

• Collective Action: Toward Solving a Vexing Problem to Build a Global Infrastructure for Financial Information (February 2017): In this paper published by the OFR, former Chair of the LEI Regulatory Oversight Committee (LEI ROC) Matthew Reed and former LEI ROC Vice Chairs Bertrand Couillault and Jun Mizuguchi state: “The LEI experience is not a solution for every problem, but it demonstrates the need for collective action and the need to focus on the often-ignored infrastructure of financial markets that will only become increasingly integrated. (…) In addition, some expected regulations that would mandate LEI adoption have not materialized. We must overcome these challenges to improve the likelihood of a network effect taking hold to make the LEI truly ubiquitous.”

• An Approach to Financial Instrument Reference Data (March 2017): “Data describing financial instruments are often complex, incomplete, and incompatible. These weaknesses impede companies and investors in managing their risks and regulators in overseeing financial firms, markets, and the financial system as a whole. (…) As with the OFR’s linchpin LEI project, the success of the OFR’s financial instrument reference database initiative will depend on the adoption and implementation of data standards and stakeholder use of reference data conforming to those standards. (…) Lessons learned from the creation of the LEI underscored the need for top-level support and close collaboration between the public and private sectors.”

United States Commodity Futures Trading Commission: “LEI renewals may be enforced in the future”

GLEIF has regularly commented on the importance of the timely renewal of LEIs. Renewal means that the reference data, i.e. the publicly available information on legal entities identifiable with an LEI, is re-validated annually by the managing LEI issuer against a third party source. If a legal entity fails to renew and re-certify its LEI registration by the ‘Next Renewal Date’ stated with its LEI reference data, then the registration status of this LEI will be set from ‘issued’ to ‘lapsed’. 

In January 2017, Lexology reported that the U.S. Commodity Futures Trading Commission (CFTC) “continues to prioritize the enforcement of reporting violations. In fiscal year 2016, the CFTC issued more than double the number of enforcement orders for reporting violations than in the previous fiscal year. A number of these violations involved new reporting requirements under Dodd-Frank.” Reporting parties should take care to ensure the accuracy of LEIs in their reports to swap data repositories, “including in the cross-border context where privacy laws and other considerations may come into play. Care should be taken to ensure that each LEI is not lapsed, retired, or cancelled. LEI renewals may be enforced in the future.”

Global impact: XBRL International has released a new LEI taxonomy for comment

In June 2016, the XBRL International Best Practices Board, in cooperation with GLEIF, formed a working group to examine and make recommendations about the best ways to create consistency in referencing legal identity within XBRL documents. XBRL is the international standard for digital reporting of financial, performance, risk and compliance information, although it is also used for many other types of reporting. The open XBRL specifications are freely licensed to anyone seeking to use the standard. XBRL allows the creation of reusable, authoritative definitions, called taxonomies, that capture the meaning contained in all of the reporting terms used in a business report, as well as the relationships between all of the terms.

In May 2017, XBRL International released “a new LEI taxonomy for our stakeholders to experiment with and comment on. The LEI taxonomy is intended to provide a single and consistent way for regulators (and companies) to use LEIs within XBRL reports. Once finalised, this taxonomy is intended to be embedded into the reporting requirements published by regulators and standards setters.” The taxonomy contains an embedded XBRL formula in it to ensure that the LEI being submitted conforms to the requirements set out by GLEIF. Comments on the new taxonomy, as well as suggestions for developing relevant and consistent guidance for its use are welcome and can be provided to the Legal Identity in XBRL Working Group by email (see link to the article titled ‘A Step Closer to Certainty in Global Identity’ below for further information).

Global impact: GLEIF urges firms and their clients to get an LEI as soon as possible in readiness for MiFID II/MiFIR

GLEIF has continued its efforts to alert market participants that will have to comply with the forthcoming EU revised Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR) to obtain an LEI as soon as possible. Failure to obtain an LEI (by the firm or its client) in time will prevent firms from being able to comply with the reporting requirements applicable in the EU as of 3 January 2018. To further streamline the issuance of LEIs, GLEIF has introduced the concept of the ‘Registration Agent’, which allows organizations to help their clients to access the network of LEI issuing organizations.

MiFID II and MiFIR, which cover trading venues, investment firms and intermediaries, will take effect on 3 January 2018. The MiFID II/MiFIR implementing legislative acts require a significant number of actors to obtain an LEI that are under no such obligation to date. With regard to transaction reporting under MiFIR, the European Securities and Markets Authority (ESMA) has clarified that investment firms should obtain LEIs from their clients before providing services which would trigger reporting obligations in respect of transactions carried out on behalf of those clients.

The LEI issuing organizations are standing ready to assist legal entities to obtain an LEI as well as to collaborate with firms interested in acting as a Registration Agent. However, we cannot guarantee that LEIs will be issued in time for MiFID II/MiFIR to apply if registration is delayed until the fourth quarter of 2017.

For more information including on the role of a Registration Agent, refer to the GLEIF press release of 6 April 2017 included in the ‘related links’ below.

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