LEI and the Profit Motive

As the newly installed editor of Inside Reference Data, I’d like to start by picking up where my predecessor Tine Thoresen left off last month. We expect to keep hearing a lot about legal entity identification (LEI), with the US Office of Financial Research (OFR) preparing to put an LEI standard in place on July 15.

Last month, at its Financial Services Technology Leaders Forum, the Securities Industry and Financial Markets Association (Sifma) picked up the mantle that had been set up by other industry leaders concerning LEIs, as an opportunity to make changes for the better in the functioning of the industry. The greatest advantage the new LEI standard could yield, according to executives who spoke at the Sifma forum, is improvement in firms’ risk management (page 16).

Yet, even with a looming deadline, there still seems to be swirling uncertainty around how the new standards will be put in place, confronting the industry with questions about where to store data, how to get a full end-to-end, front- to back-office view of data, and how to evaluate data quality.

One might be well-advised to take a look back nearly 10 years ago, when securities industry technologists were debating about how to handle straight-through processing, a trading initiative that, while not regulation-driven, did spawn two organizations to serve the function, the not-for-profit GSTPA, and the for-profit corporation Omgeo, which began as a joint venture of Thomson Reuters (its pre-merger Thomson half) and DTCC. Omgeo thrived, while the now-defunct GSTPA is little remembered by those with less than five years’ involvement in the industry.

This history holds a lesson for how to serve the industry’s demands for setting and working with LEIs. That lesson is that it could be time to consider setting up a for-profit, or at least “non-non profit” as some put it, company to handle LEIs. Although the changes to LEIs appear to be driven by the US, AFME (the Association for Financial Markets in Europe) and ASIFMA (the Asia Securities Industry and Financial Markets Association) have joined Sifma in forming the Global Financial Services Trade Associations, which is expected to recommend providers to issue LEIs right around the time this issue goes to press. Will the trade associations point to providers that already exist? Will those providers be ones that are already profitable? Will there be any surprises in what the associations recommend?

The answers to these questions will affect how the new LEIs are implemented and how requirements and mandates are met. The process is expected to last from a year and a half to two years, beyond the July 15 date, as different regions and countries complete their rulemaking. Undoubtedly, the effectiveness of the new LEI standard at improving risk management will depend on who carries it out.