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Michael Shashoua, editor, Inside Reference Data

Where Crisis Equals Opportunity

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Legal entity identifier implementation concerns could be a chance for clever service providers to offer a solution to ensure accuracy

In the last column of 2012, I looked at the next phase of legal entity identifier (LEI) implementation following establishment of structures and protocols for registering identifiers. As the year begins, the challenges of getting registrations done are becoming evident, as I'll report in an upcoming feature on the topic.

In short, however, two concerns appear paramount: determining who actually needs to register for LEIs and making the identifiers accurate. The confusion about who should register (or what entities have to be registered) stems from the existence of pools or funds comprised of multiple securities and funds that are sub-units of other larger funds. That seems like an addressable issue.

The issues with accuracy are more troubling. The US Form 5500 disclosure document that would be a basis of LEI implementation work may misidentify the addresses of major companies as being at the banks where they process the majority of their financial transactions, rather than at their actual headquarters. So one half of the Fortune 500 could conceivably appear to be located at J.P. Morgan Chase's New York office, and another half might seem to be lodged at Citi's corporate HQ. Add that to the inevitable tangles over identifying which banks or investment firms own a certain holding of a company's securities, and you have the recipe for quite a mess.

Financial InterGroup Holdings, the industry advisory firm that has proposed LEI alternatives and sought to become a registration authority in the past, has proposed a possible solution to the accuracy issue. That's an Ultimate Control Point LEI (UCPL), which would be an addition or auxiliary reference data item to the 20-character ISO 17442 standard for the LEI, added to the LEI registry specifically to point to multiple parties that may be attached to a business entity. This doesn't exactly solve the physical location data issue, but could clarify who the holders of the securities are – since 20 characters apparently aren't enough to contain or encode those details.

Perhaps something like a QR code or a UPC code would be way too cumbersome for the purpose of identifying securities, but is an alphanumeric code of more than 20 characters, possibly as many as 30 characters, too large as well? It seems like a good opportunity for an inventor or entrepreneur who could come up with a miniaturized version of a QR code for this purpose – and an onscreen-only one at that, so the industry would not end up back in the paper realm.

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Mixed metaphors ?

Michael, You have identified an important issue that relates to the financial transactions made on behalf of customers by banks or broker/dealers (in a custodial or brokerage type of capacity), but I do believe that the reference to the Financial InterGroup's proposal of an 'Ultimate Control Point LEI' does not apply as you have described to "designate multiple parties that may be attached to a security". My understanding, which I encourage you to confirm with Financial InterGroup, is that the 'Ultimate Control Point' is a mechanism intended to identify the legal entity (or agent) within a hierarchy of related entities that would be responsible for managing and maintaining the data that describes the relationships between the peers, parents and children of all of the legal entities that belong to an organizational family of legal entities. The use of the LEI as it pertains to being used to identify securities, financial assets, and transactions between legal entity counterparties (or on behalf of legal entities by, say, broker/dealers, funds, commercial banks, or financial clearing houses) is an application of the LEI to tag and identify the ownership by legal entities of financial positions, and not to identify the organizational relationships among legal entities in a hierarchical organizational structure. The former is a topic and issue that clearly needs to be addressed as it pertains to the use of the LEI after it has been established, and the latter is what FIG has in mind with the 'Ultimate Control Point', if I understand them correctly.

Posted by: Jefferson Braswell Jan 07 2013

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