The International Organisation of Standardisation (ISO) has published a standard for Legal Entity Identifiers, designed to provide unambiguous identification of counterparties engaged in financial transactions.
The creation of a federated LEI database that is accessible by all will be a welcome result of this initiative. Initially populating such a database will take some time but is quite achievable given that the national bodies may well be able to link this
to existing identifiers issued to registered legal entities. But that is the easy bit.
Maintaining the quality of that data in near to real-time poses a huge problem which, if not addressed, will cause the global financial community to believe that they are correctly reporting counterparty risk because it complies with the LEI database, when
in fact the risk is incorrectly stated because the underlying data in the federated LEI database is out of date.
As an example, a global bank headquartered in the US agrees to sell off a division of its business with subsidiaries in multiple jurisdictions and some SPV's in exotic locations. Although there will no doubt be a regulatory announcement that the listed global
bank has completed the deal, there will be no exact detail of which legal entities are part of the deal. Until all of the changes to legal ownership are registered in the LEI database, every counterparty who deals with with one of the subsidiaries or SPV's
will be incorrectly aggregating their counterparty risk to the wrong ultimate holding company.
The financial intermediaries who are responsible for the actual transfer of legal title need to be required to submit a change record to the LEI database. This would need to be in a structured format that be used as an automated update to the LEI database
that would then get synchonised globally across the federation.
How do you identify who should have responsibility for these timely updates and do you enforce this?
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