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LEI - competition or global monopoly?

The US OFR has asked the financial industry to come up with a standard Legal Entity Identifier that doesn’t include any “information”.  That means that the identifier won’t give away any information about the entity itself – its name, its type or the country that it is based in.  This is an opportunity for the industry – globally – to provide its input and feedback.

A previous  proposal  was to re-use the ISO 9362 standard for a Bank Identifier Code (BIC) as a Business Identifier Code. That allowed 4 characters to define the bank, 2 for the country it’s in, 2 for the “location” and 3 for the branch.  So a code like “BNPAFRPPNIC” would tell you that this is BNP Paribas in France, with an internal location code, and that it’s located in Nice (probably).  This standard started life as a network address identifier and then the business requirement for an industry-standard business entity identifier got shoehorned into the same format.  That way banks wouldn’t have to change their applications and their messaging service provider wouldn’t have to change its applications either.

The new proposal for an ISO-standard LEI is for a longer 20-character field (2 characters of which would be for check digits), but none of the content of that field should necessarily include any information about the legal entity itself.  It’s hard to see how this approach would work unless there was only one single issuer of all legal entity identifiers for the whole world.  That would be like having just one company to issue all of the telephone numbers in the world – and the world doesn’t work that way, of course.

Meanwhile, the UK Cabinet Office last week announced that it wants to see a market with competing providers of identity assurance services.   Which approach do you think is most realistic and appropriate?

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Comments: (9)

A Finextra member
A Finextra member 27 May, 2011, 07:40Be the first to give this comment the thumbs up 0 likes

Chris

I am very concerned that the LEI will create a monopoly. I think that a global not for profit utility organisation should be created to be the registration authority and establish the LEI code. I do not believe that its beyond standard experts to come up with a workable code that achieves the objective. The utility organisation could be made up of all types of business so global network providers could sit alongside database providers and those that produce hardware and software and even social media!

In this way the LEI would allow the users of LEI choice and reduce the costs of software development.

Otherwise i can see the LEI missing the target and causing the users of LEI that need it to actually refrain from it. We could also see the industry go once again into committee and debate mode and not see a LEI solution for decades    

Allan Grody
Allan Grody - Financial InterGroup - New York 31 May, 2011, 14:02Be the first to give this comment the thumbs up 0 likes

Chris:

       While your telephone analogy concern is well founded, there is a business model in existence today that has been around for nearly four decades, that has solved the unique identification problem in the global commercial trade supply chain. Now in partnership with our firm, we are proposing to share this system with regulators and the financial services industry for solving the same problem in the global financial supply chain.

GS1 (www.GS1.org) operates a federated model with Member Organizations in 110 countries. The federated model allows for local involvement and, where required local regulatory oversight. However, it operates its self-registering numbering assignments from a single pool of numbers administered through a distributed data model.

In this way GS1 has  uniquely, unambiguously and universally identified 1.5 million companies and 40 million products across 25 diverse global industries. The same numbers and system, already a ISO sanctioned standard that is used to identify these businesses today are proposed for use as the LEI (Legal Entity Identifier) for the US Treasury's OFR (and the analogous UCI - Unique Counterparty Identifier for the CFTC and the UIC - Unique Identifier Code for the SEC). See http://www.gs1us.org/sectors/financial_services and click on gs1_responses_to_requests_for_comment for these publically available proposals.

The UK cabinet offices interest in competing identity assurance services fits well with our proposal to have public auditors apply their assurance function to the LEI and its minimum data attributes. We also see XBRL playing a role in creating templates for the LEI so that it can be “certified” at its source of origination.

A Finextra member
A Finextra member 31 May, 2011, 14:32Be the first to give this comment the thumbs up 0 likes

This is a demonstration of the point i made that worries me. There are any number of commercial supliers that can bring a solution and all will no doubt work on paper but in practice the industry will just consolidate to a mass number of vendors and we will be left with muliple solutions. The industry needs a not for profit organisation along the lines of FIX so that any LEI solution will be made free to all

Allan Grody
Allan Grody - Financial InterGroup - New York 31 May, 2011, 16:01Be the first to give this comment the thumbs up 0 likes

Gary:

      GS1 is a global non-profit federation.  In the US it operates as a 501 c 6  non-for-profit organization. It has only one purpose in life - to administer a globally unique number. The number is  freely available. It allows interoperability and leaves in place all business interests to create added value services. Not unlike the  english language, which allows everyone to use it  freely but also be able to create commercial models around poetry, prose and great works of literature.

Proprietary numbers have a place as long as the commercial provider shows added value to its clients and links to the GS1 Registry (this is to be accomplished through regulatory compulsion, the one new thing that will actually allow a globally unique, non-proprietary numbering convention to occurr) . Thereafter, interoperability is assured, both for regulators and the financial institutions who, either through their data vendors or directly,  will link up and map to the new LEI. Legacy systems can slowly be changed  to use the LEI directly as systems are decomissioned over time.

A Finextra member
A Finextra member 31 May, 2011, 17:14Be the first to give this comment the thumbs up 0 likes

Thanks Allan thats fantastic and i was totally unaware of this organisation. Your description looks like it fits my bill and should many others in the industry.

What is your organisation doing to move the LEI forward internationally and do you see the future as more collaberative with similar global groups?

Does your organisation see working with delivery firms like networks and other market portals?

SWIFT appear to have staked a claim as the registration authority biut how does this affect your organisation plans?

Sorry for the questions but sure others in the industry would like to now

 

Regards

 

Gary    

Jim Northey
Jim Northey - Itiviti Group AB - Hancock 10 March, 2012, 00:08Be the first to give this comment the thumbs up 0 likes

SWIFT as a global utility owned by the industry must play a vital leadership role. DTCC as one of the primary global trade registries and via their AVOX subsidiary, a possessor of one of the highest quality legal entity databases (along with Kingland), needs to be involved. But, if we allow a monopoly to form the industry will not be served well, as the Internet was not served well when Network Solutions was the sole supplier of domain name registration. In addition, the LEI, to be successful needs to be global. Many countries already have existing legal entity databases that are best federated. The federated approach would ease pressure on compliance, permit a much more rapid population of identifiers, permit other countries to participate readily, and should significantly lessen the burden and costs globally.

If I were to have any input on this process it would be: analyze what works for domain name registration, look to existing well proven federated identity technology that is low cost and well proven, and establish a competitive structure that complements our vital global utilities, SWIFT and DTCC.

What is really interesting is if the LEI was not logistically complex in and of itself, the classification of legal entities and the identification and maintenance of the relationships between entities is an order of magnitude more complex. The job cannot be done by one entity with passive industry participation by the entities being identified. As part of some form of regulatory compliance, each entity or a designated agent should be made responsible for maintaining its entity identification and relationships. We had a discussion following the FIX Canadian Quarterly meeting yesterday in Montreal about the woeful job being done across the industry in maintaining party information.

The good news is the FIX protocol and FIXML already have some well designed messages for the maintenance and delivery of party details that include party relationships. This work was led by the CME Group and Deutsche Boerse and as of the completion of recent extension packs if a very mature and complete model ready for further industry adoption, that fully covers transactions (CRUD), inquiry, and publication of counterparty information including relationships between counterparties.

Jim Northey
Jim Northey - Itiviti Group AB - Hancock 10 March, 2012, 02:55Be the first to give this comment the thumbs up 0 likes

Gary - to your question about GS1 vis-a-vis SWIFT as registration authority (RA) for the ISO 17442 standard. These do not necessarily have to be mutually exclusive. SWIFT as a proven administrator of global identifiers could work with GS1 and there is probably enough flexibility in the ISO 17442 standard to accomplish this.

I think we should separate the provision of infrastructure from the overall management of the standard upon which the LEI is based.

Another technology platform that is an industry standard as well is the digital object identifier (DOI) infrastructure. The DOI could be designated by the RA and standards adopters to permit a federated registry, which is surely required for such a complex endeavor.

I also agree that XBRL as a point of capture for entity data is one component in the capture process, but likely there will also need to be the transactional and proven backbone capabilities of FIX/FIXML and similar standards.

A Finextra member
A Finextra member 10 March, 2012, 08:09Be the first to give this comment the thumbs up 0 likes

Thanks for the comment and some interesting views and information. My hope is that the new LEI is just that new. It would be great if it made use of existing identifications but i suspect that will make it too complex and we wil spend many years trying to please everyone.

FPL is a very good agent to get LEI introduced but it will need a greater still entity to get it globally introduced accross products. The solution to me is as much about the industry structure working to create LEI and maintain it as it is about the design

Jim Northey
Jim Northey - Itiviti Group AB - Hancock 10 March, 2012, 12:55Be the first to give this comment the thumbs up 0 likes

Gary,

My fear is that those likely in control cannot think beyond 1960-1970s central database models for the creation and maintenance of identifiers. The LEI effort will become an incredible burden for the industry and even moreso for the utility responsible for the LEI if a central issuance and database model is attempted. Technologies exist currently that will permit a federated models where there can be a certain degree of competition to introduce efficiencies, permit reuse and federation of existing identifiers, and lessen the burden on building and maintaining the LEI.

Regarding FIX Protocol Ltd's (FPL) role in this, the overall consensus opinion is that FPL tries to represent the consumer voice in this as FPL membership is made up of the banks, brokers, buy-sides, exchanges, ISVs, and network providers that will be impacted and must integrate the LEI into their processing streams.

FPL is way out in front in terms of providing mechanisms to communicate and manage counterparty identification and more importantly party relationships, but this is just facilitation of transport, maintenance, and communication of the identifiers, whatever they are, as opposed to being the organization that will assign and maintain the identifiers themselves. We in essence are the plumbers in the world of identifiers, it will be largely up to much larger and more entrenched players to decide if the plumbing is carrying fresh water or waste water by way of analogy.