The Federal Reserve Board on Monday announced a proposal that would require banking organizations to include their existing Legal Entity Identifiers (LEIs) on certain regulatory reporting forms. The LEI is a unique reference code to enable easier identification of a firm's legal entities.
During the financial crisis, regulators and the public were often unable to fully assess the extent of a firm's exposures across all of its legal entities. The LEI is a 20-character alphanumeric code assigned to a legal entity of a financial or non-financial firm, allowing more effective measurement and monitoring of the exposures of a firm's legal entities, especially in times of stress.
The Federal Reserve's proposal builds on the framework introduced by the Financial Stability Board--an international body of financial regulators that monitors and makes recommendations about the global financial system--to implement a global identifier system that would uniquely identify parties to financial transactions. LEIs are assigned by Local Operating Units of the Global LEI System, which are responsible for registering legal entities and assigning LEIs to institutions in local jurisdictions. The Global LEI System was initiated by the Financial Stability Board.
The proposal would require banking organizations to include LEIs for its relevant units on certain reporting forms as of June 30, 2015. Comments on the proposal are requested within 60 days of publication in the Federal Register.However, if you open the document, the disappointing surprise on page 7 is this:
Current Actions: The Federal Reserve proposes to collect the Legal Entity Identifier (LEI) for all banking and nonbanking legal entities reportable on the Banking, Non-Banking, SLHC, and 4K schedules (not the Branch schedules) of the FR Y-10 and on the Organization Chart section of the FR Y-6 and FR Y-7. The LEI is a 20-character alphanumeric code that is universal and uniquely corresponds to a single legal entity.1 The Federal Reserve is only proposing requiring the reporting of an LEI if one has already been issued for the reportable entity at the time of collection. At this time, the Federal Reserve is not requiring an LEI to be obtained for the sole purpose of reporting the LEI on the FR Y-6, FR Y-7, and FR Y-10.If the LEI is going to work, the Fed and other regulators will need to “require.”
Mandate that the world’s largest financial institutions register all their legal entities and demand a high level of data quality; or Pay them to comply, using funds from recently assessed regulatory penalties. Before I get into the details, some history …What’s an LEI? The idea for a “bar code” for financial market participants dates back more than 20 years.
“The LEI concept is quite simple: every financial firm should be required to have one consistent identification code (the LEI) ‐ similar to a social security number that is used anytime the firm enters into a financial transaction or trade. Similarly, any entity that engages in a transaction with a financial firm should also be required to have an LEI.” (Tom Price and David Strongin, “Why the Industry Wants Better Financial Data,” May 13, 2013)The acute need for a legal entity identification system and LEIs was spurred by the financial crisis, when financial institutions and regulators could not determine counterparty exposure to Lehman Brothers, which at the time of its bankruptcy had more than 8,000 legal entities in 40 countries. The belief was that the “counterparty interconnectedness” problem could be solved by a global entity identification system. The Dodd‐Frank Act was the first global regulation to address the counterparty risk issue and initially focused on swaps, which Warren Buffett at one time called “financial weapons of mass destruction.” Transparency, standardization and reduction of risk were acknowledged to be the critical benefits of swap data repositories, for which the establishment of a legal entity identification system was deemed imperative (“Swap Data Recordkeeping and Reporting Requirements,” Dec. 20, 2011, CFTC):
“To enhance transparency, promote standardization, and reduce systemic risk, Section 727 of the Dodd‐Frank Act added to the CEA new section 2(a)(13)(g) which requires all swaps, whether cleared or uncleared, to be reported to swap data repositories (“SDRs”), which are registered entities created by section 728 of the Dodd‐Frack Act to collect and maintain data related to swap transactions as prescribed by the Commission and to make such data electronically available to regulators. “LEIs will be a crucial tool for enabling the Commission and other regulators to search, aggregate and use the swap data reported to the SDRs for fulfill the purposes of the Dodd‐Frank Act.”Proposed benefits A GFMA (Global Financial Markets Association) presentation dated Nov. 10, 2011, called for the creation of a global legal entity identifier standard. The need for such a standard had existed for years; there was never a strong enough regulatory or commercial impetus to get the project off the ground. Two sets of benefits were highlighted in the GFMA presentation: Benefits to Regulators – a common LEI will be a powerful tool for regulators in monitoring and managing systemic risks.
Mandate that the world’s largest financial institutions register all of their legal entities or Pay them to comply, using funds from recently assessed regulatory penaltiesIt is not unreasonable to assume that 80% of the world’s systemic financial risk can be attributed to, not 20% of the world’s financial institutions, but to perhaps 2% of the world’s financial institutions. What we recommend is that regulators allocate $100 million per year so that the world’s 100 largest financial institutions can publish, on a monthly basis, their entire corporate legal hierarchies in a standard, easy‐to‐consume format. For $1MM a year these 100 financial institutions can each hire and house four people who would be responsible for collecting, understanding and publishing their firms’ corporate hierarchies with a defined set of data attributes, including the LEI. If this funding model was in place for two years, practically all the benefits to the regulators and the industry outlined above would be achieved for the financial institutions that matter. These financial institutions could then be weaned off the regulatory subsidy and pay for the ongoing maintenance themselves and could, in turn, cooperate with the LOUs to get the long tail of the financial community registered for LEIs. This could be accomplished at the time of onboarding or during the periodic KYC review. While having the regulatory authorities bear the start‐up costs for the GLEIS may seem like a radical suggestion:
The current system is in slow motion, and a strong plan to accelerate it does not exist. The money is available from recently levied fines. By paying the financial institutions to comply, the regulatory authorities can theoretically wield a stick they currently do not have.
Overlap between Alacra Authority File and LEI Universe
The Alacra Authority File provides reference data and entity identifier mapping on a universe of over 200,000 entities that are either rated, regulated or listed. This dataset contains most of the common customers and counterparties of large, global financial institutions. The chart to the left shows the overlap between the rated, regulated and listed universe and the LEI universe (without the entities registered by the Japanese LOU). Download “Inside the LEI – Part V" now.
LEIs Assigned to Large Fund Families
Funds of various types make up a large percentage of entities that have been assigned an LEI. The chart above highlights the number of registered funds of several large global fund families.
EBA Entities that have been Assigned an LEI
This is Part 2 of excerpted posts from Alacra’s Inside the LEI series – Issue IV
Percentage of Rated Entities Assigned an LEI
The rated universe Alacra covers includes those entities/issuers rated by A.M. Best, Moody’s, S&P and Fitch. This totals around 70,000 entities globally. Abo
When we last published Inside the LEI in May there were 13 pre-Local Operating Units (LOUs) and about 237,000 entities that had been assigned an LEI. Six months later, there are 19 pre-LOUs and over 311,000 entities have been assigned an LEI. That’s an increase in entities covered of 37%.
Our analysis in the spring highlighted the fact that many entities that should have an LEI did not, and that many entit