Legal Entity Identifiers: An Emerging Risk Management System

Make room in the rulebook for the Legal Entity Identifier (LEI). Finextra reported Thursday that support for a “system to help regulators and industry participants monitor systemic risk” is growing.

An LEI system would have many benefits -- the biggest of which is that it creates a universal system that helps financial services companies manage counterparty risk, according to industry trade group the Securities Industry and Financial Markets Association (SIFMA). A SIFMA white paper from May 2011 stated:

A global standardized Legal Entity Identifier (LEI) will help enable organizations to more effectively measure and manage counterparty exposure, while providing substantial operational efficiencies and customer service improvements to the industry ... The LEI Solution is a capability that will help global regulators and supervisors better measure and monitor systemic risk. Equally important, the LEI Solution will help individual firms more effectively measure and manage their counterparty exposure and improve operational efficiencies.

What’s next?

The International Organization of Standardization (ISO) voted for Belgium-based financial telecommunications provider SWIFT to register LEIs. A draft of standards could be ready by the end of June.

Also, the U.S. Office of Financial Research (OFR) asked for input on an LEI system in November. The Dodd-Frank-authorized OFR wants a system ready for adoption around mid-July. The British Bankers Association and others are also addressing LEI requirements.

Here’s hoping the new standards help everyone concerned to manage risk, calculate their margins and tell good from bad. Or deep from shallow in pool rules speak. We’ll stay tuned.

What do you think?