Taking the Next Step: Legal Entity Identifier Regulatory Oversight Committee Proposes Process for Collecting Data on Direct and Ultimate Parents of Legal Entities

Legal Entity Identifier Regulatory Oversight Committee published the report ‘Collecting data on direct and ultimate parents of legal entities in the Global LEI System – Phase 1’

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Following a public consultation carried out in 2015 by the LEI Regulatory Oversight Committee (LEI ROC), on 10 March 2016 the LEI ROC published a document, entitled ‘Collecting data on direct and ultimate parents of legal entities in the Global LEI System – Phase 1’ (see ‘related links’ below). The paper “sets forth the policy design of a process for collecting ‘Level 2’ data”, to complement the existing ‘Level 1’ LEI reference data.

As a result, the global LEI data pool will provide information on ‘who owns whom’ in addition to ‘who is who’. The LEI ROC is a group of over 70 public authorities from more than 40 countries established in January 2013 to oversee the Global LEI System.

The LEI ROC paper states that the approach for collecting data on organizational relationships is based on several premises: “First, the approach is assumed to be incremental. Because complexity in this area is high, the process implemented must proceed in steps as manageable as possible and the implementation process must be structured so that subsequent steps can be approached based on what has been learned. Second, the initial relationship types to be captured are to be based on accounting standards. Many other aspects of ownership, control or other relationships may be highly relevant in later phases, but the need for relative simplicity and clarity argues for a measure with sufficiently common support in all jurisdictions.” Finally, the implementation approach developed for the first phase should also be cognizant that one of the key principles of the Global LEI System is that “data should be openly and freely available.”

This blog post describes the rationale for collecting ‘Level 2’ data within the Global LEI System, highlights the main features of the process of collecting this data proposed by the LEI ROC and outlines the next steps to implement this policy.

Recap: the rationale for collecting ‘Level 2’ data within the Global LEI System

In the GLEIF blog post entitled ‘The Global LEI System: A Look Back and a Look Ahead’ (see below) the former LEI ROC Chair Matthew Reed recalled the rationale for creating the Global LEI System: “In 2012 a group of authorities from around the globe decided we needed to solve a ’collective action’ problem that had been vexing to the industry and regulators for decades: how to develop and implement a common entity identification system that could serve as a linchpin to identify financial market participants and connect data. We realized the system needed to help answer three basic questions: Who is who? Who owns whom? And who owns what?”

The Global LEI System is designed to ultimately deliver the answers to these questions. Simply put, the publicly available LEI data pool (see link to the Global LEI Index below) can be regarded as a global directory, which greatly enhances transparency in financial markets.

The LEI is a 20-digit, alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). It connects to key reference information that enables clear and unique identification of legal entities participating in financial transactions. The reference data provides the information on a legal entity identifiable with an LEI. The ISO 17442 standard defines a set of attributes or LEI reference data that are the most essential elements of identification. It specifies the minimum reference data, which must be supplied for each LEI:

• The official name of the legal entity as recorded in the official registers.
• The registered address of that legal entity.
• The country of formation.
• The codes for the representation of names of countries and their subdivisions.
• The date of the first LEI assignment; the date of last update of the LEI information; and the date of expiry, if applicable.

Additional information may be registered as agreed between the legal entity and its LEI issuing organization. The information available with the LEI reference data to date is referred to as ‘Level 1’ data. It provides the answer to the question of ‘who is who’.

The LEI ROC document published in March 2016 describes the process of enhancing the LEI reference data to include the ‘Level 2’ data that will answer the question of ‘who owns whom’.

The main features of the process of collecting ‘Level 2’ data proposed by the LEI ROC

As outlined in the executive summary of the LEI ROC paper ‘Collecting data on direct and ultimate parents of legal entities in the Global LEI System – Phase 1’, the main features of the proposal are:

• An incremental approach: this document identifies the priority features that should be part of the first phase of this data collection, with the objective of starting implementation around the end of 2016. Adding data on parent entities was envisaged in the 2012 Financial Stability Board recommendations on the LEI and would augment the usefulness and attraction of the system for users. At the same time, the system is still at an early stage of development, with 420,000 entities worldwide having acquired an LEI. The proposal seeks to avoid imposing unwarranted costs or complexities that could be detrimental to the expansion of the system. The LEI ROC is aware that this first phase may not meet all the needs expressed in the consultations and will work on expanding the scope of relationship data in future phases, in consultation with relevant stakeholders.
• Entities that have or acquire an LEI would report their ‘ultimate accounting consolidating parent’, defined as the highest level legal entity preparing consolidated financial statements, as well as their ‘direct accounting consolidating parent’. In both cases, the identification of the parent would be based on the accounting definition of consolidation applying to this parent.
• Accounting definitions were chosen as a starting point as the LEI ROC concluded that their practical characteristics outweighed limitations caused by the fact that they are designed for a different purpose, i.e., to report relationships to investors on a going concern basis. These practical characteristics are that: (i) they are applicable to both financial and non-financial companies; (ii) their international comparability has increased, following greater convergence between IFRS (International Financial Reporting Standards) and US GAAP (Generally Accepted Accounting Principles) on the scope of consolidation; and (iii) they are widely used, publicly available and their implementation is periodically reviewed by external auditors.
• The information collected would be published in the Global LEI System and therefore freely available for public authorities and market participants, subject to a pilot phase to examine issues associated with collecting data on parents that do not have an LEI. At this stage, the Global LEI System will only record relationship data that can be made public, in accordance with the applicable legal framework.
• Entities would report relationship information to the LEI issuing organizations of the Global LEI System, which would verify the relationship information based on public documents if available (e.g., list of subsidiaries in audited consolidated financial statements; regulatory filings), or other sources.
• Information on parents would be part of the information that must be provided in order for an LEI to be issued or renewed, but with the option to decline providing this information for the reasons listed in section 3.3.1 of the LEI ROC’s report.

Section 3.3.1 states, among other things, that the LEI ROC considers that there should only be the following limited list of reasons for an entity to decline providing information on its parents, knowing that the adequacy of the list will be reviewed by the LEI ROC “as needed in light of experience”:

a) There is no parent according to the definition used: this will include for instance (i) the entity is controlled by natural person(s) without any intermediate legal entity meeting the definition of parent in the Global LEI System; (ii) the entity is controlled by legal entities not subject to preparing consolidated financial statements (given the definition of parents in the Global LEI System); (iii) there is no known person controlling the entity (e.g., diversified shareholding).

b) Legal obstacles prevent providing or publishing this information: this will include (i) obstacles in the laws or regulations of a jurisdiction; (ii) other binding legal commitments such as articles governing the legal entity or a contract.

c) The disclosure of this information would be detrimental to the legal entity or the relevant parent. This will include reasons generally accepted by public authorities in similar circumstances, based on a declaration by the entity.

Next steps

The LEI ROC paper concludes: “The collection of relationship data will open areas that are new from a global perspective and potentially difficult to address clearly from the start. As such, there will be a continuing need for decisions as the work progresses. Those decisions should be taken in light of their (1) potential benefits and costs, (2) feasibility of implementation, and (3) potential for unfavourably skewing incentives to participate in the Global LEI System, particularly in terms of Level 1 coverage.” Throughout the development of the first phase of implementation, the LEI ROC will work closely with the Global Legal Entity Identifier Foundation (GLEIF) and “the process will ensure input from relevant stakeholders. As regards future phases of development, further consultations may be conducted.”

GLEIF will be responsible for carrying out the project management and developing the organizational and technical standards required to collect data on direct and ultimate parents of legal entities in the Global LEI System. GLEIF looks forward to realizing this important next step and will regularly publish updates on the progress of the project. Availability of the information on ‘who owns whom’ with the publicly available LEI data pool will further increase the benefits of LEI adoption for users across the global market place.

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