Identification Specifics Take Shape

Identification of securities and other financial instruments is a major trend Inside Reference Data expects to see a great deal of development in this year, as mentioned last month in this column. In stories in our March issue, also available online, it’s evident that the legal entity identifier and other identifications are seeing certain specifics take shape and become more clear.

As Nicholas Hamilton writes, the Financial Stability Board’s Industry Advisory Panel is deep into consideration of LEI provisions, in preparation for the G-20’s June summit. Implementing the LEI requires funds, and part of the planning is determining where these funds are going to come from, as the FSB’s panel considers an LEI registration fee. The number of attributes of a security or financial instrument to be included in the LEI is also a matter of debate. This story looks at all the choices the FSB and its panel will have to make.

The FSB is also considering LEI eligibility criteria, particularly what entities should be eligible, and when and whether ancillary data may be added to an LEI offering.

Another issue created by the LEI is the need to match up data from varied systems in use at firms. Also, any consideration of LEI inevitably goes back to its reason for being in the first place, which is to reduce risk in the markets by making it easier to identify securities in tandem with who is trading them or holding them. In an Inside Reference Data webcast on March 1, attendees pointed to the great importance of the LEI in mitigating counterparty risk, and noted that managing legal hierarchies around counterparties is bound to involve tracking LEIs. The discussion also pointed out the hurdles the LEI will have with reconciling different countries’ domestic LEI standards and the potential difficulties and costs involved in integrating LEIs in reference data systems.

Since July, the industry’s recommendation of several organizations (ISO, Swift, DTCC and Anna) to administer aspects of LEI operations, has been in place. Over-the-counter derivatives, a key part of the financial crisis that initiated the regulation that is spurring adoption of the LEI, are still the focus of instrument identification efforts. Assignment of the International Securities Identification Number, administered by Anna, is complicated by the need to identify both products and individual transactions of OTC derivatives. The International Swaps and Derivatives Association has put forward its own proposals for a product identifier and registry facility.

The association also backs FpML, a standard criticized by other factions such as the Enterprise Data Management Council, which promotes semantic representations for OTC derivatives.

It appears that with all these possibilities, when it comes to OTC derivatives identification standards, reconciling them or finding a compromise could be just as challenging as achieving a global LEI standard accepted by most countries. Reading the March issue of Inside Reference Data will give you a better idea of who is advancing which plans and why, for both OTC derivatives instrument identification and the LEI.