Dodd-Frank, Legal Entity Identifiers (LEI), and What’s in it for You

September 14, 2011

The term Legal Entity Identifier (LEI) is becoming a buzz word. The Office of Financial Research (OFR), a new agency established by the Dodd-Frank Act in 2010 under the U.S. Department of the Treasury, is using the LEI as the springboard to standardizing financial reference data.  An LEI is a unique number that identifies an entity in the financial market, in essence a “social security number” system for entities.  A cornerstone for financial data, the LEI will play a crucial role in fulfilling the mandate from the Dodd-Frank Act to improve market integrity and transparency.  In fact, the proposed rules from the Securities and Exchange Commission and the Commodity Futures Trading Commission for reporting swap derivatives transactions already depend on a universal identifier for parties of these transactions.

The lack of standardization of entity identifiers caused a major problem in the aftermath of the Lehman Brothers collapse in September 2008, as financial institutions scrambled to figure out their counterparty risk exposure to the firm. Companies, and even divisions within the same company, use proprietary schemes to identify their counterparties, making it difficult to integrate or consolidate data across systems.  Furthermore, the corporation hierarchy is not always properly reflected in these schemes, and many companies struggled to determine if their swap positions were with Lehman Brothers or not.

The industry has long recognized the need to standardize the LEI but the efforts of industry associations such as the Securities Industry and Financial Markets Association have fallen short because it is a massive, global undertaking. But now, with backing from the U.S. Government, standardization seems imminent. The OFR has the mandate, the vision and the full cooperation of the industry and international regulators.

Nine months after its first policy statement was released, the OFR issued a statement of progress on August 12th, 2011, updating the public on the LEI initiative.  According to the statement, “… the OFR believes that sufficient progress can be made to allow for an initial phase of implementation in 2012”.  Currently, the OFR is working with the Financial Stability Board, an international body consisting of financial regulators of all G-20 countries and other influential agencies, to organize a workshop in September to push the initiative globally.

So, what does the LEI look like? John Bottega, Chief Data Officer at the New York Federal Reserve and leader of the LEI effort at the OFR, co-authored a 17-page report titled “Creating a Linchpin for Financial Data: Toward a Universal Legal Entity Identifier”.   This report lays out  the key characteristics that the LEI must have. The industry has whole heartedly embraced the report, making it the most authoritative blueprint going forward.

The standardization of the LEI will have sweeping impact on financial information systems, especially where derivatives are involved.  At PORTIA, we’re constantly monitoring regulatory changes and adapting our solutions to help asset managers operate in an ever-changing environment.  The flexibility of PORTIA is unrivaled, and we are committed to address your needs to accommodate the rollout of the LEI.  

What is your take on the standardization of the LEI? How is your firm preparing for the changes?

 –          Jian Helen Yang, Product Manager


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