A Question of Characters

This month, Financial InterGroup (Fig) proposed a legal entity identifier (LEI) of 11 characters in a two-part construction, starting with a registration identification and then continuing into a five or six character LEI extension. The ISO standard Fig is challenging is alpha-numeric, with 20 characters. One might ask how a challenger to ISO 17442 can be successful with less characters available, and therefore less flexibility to accommodate more legal entities.

Rivalry between Fig and those backing and implementing ISO 17442—the Global Financial Markets Association, Swift, DTCC and Avox—has already been brewing. Back in August, I noted that Fig and GS1, a standards organization that was working with Fig, were still pushing their registry even after the GFMA threw its support to the other standard. Shortly after that, GS1 de-coupled from Fig's efforts and started working with other interested parties on LEI standards. The alignment of industry support appears to be the greater reason why Fig's standard will have an uphill battle.

"ISO, the standards body, has extensive experience within the financial services community itself, and that was one of the suggested prerequisites for the LEI standard indicated by the OFR [Office of Financial Research] back in 2011. Fig doesn't have that direct experience in the financial markets," says Virginie O'Shea, analyst at industry consultancy Aite Group. "ISO standards are familiar to those active in the post-trade space because of the prevalence of those standards in areas such as instrument and market identification. So the industry is likely to be more willing to go with a body such as ISO, rather than a completely new entity that's outside their frame of reference."

Also, having more characters could make the standard difficult to adopt within certain systems in firms' back offices, especially if they are legacy systems, but that is not the only consideration for LEI, O'Shea explains. "20 characters is quite long for a standard, but there are longer ones out there in the market," she says, noting the alternative instrument identifier that can run from seven to 38 characters. "The length of the identifier is something that could count against ISO 17442 in terms of adoption within firms' internal systems due to cost considerations. However, it should not impact its adoption in regulatory reporting terms."

The reason for the 20-character length is likely to be tied to the need to avoid running out of potential identifying numbers, according to O'Shea. "If you are trying to cover the entirety of firms active in the financial services space, 11 characters may not be enough to accommodate the universe of entities out there. It really depends on how far the regulatory community and the industry want to take the standard," she says.

ISO's working group for its standard includes industry professionals such as Karla McKenna, director of market practice and standards in the Global Transaction Services unit of Citi, who also serves as chair of the ISO Technical Committee for Financial Services (TC68). McKenna has closely followed ISO 17442 development, including work on past implementations and the peaks in use they created.

"We all need legal entity information to be able to manage our business relationships, what we call know-your-customer processes, to assess and manage counterparty and concentration risk," McKenna said in an interview with Inside Reference Data in August.

The ISO standard offers two levels—legal entities and instrument funds, while the Fig standard has two parts, the first being registration identification and the second being the LEI extension. So does the Fig standard have better means for matching? Is the ISO standard more innovative?

Time may be needed to answer these questions, but there isn't much of that with the looming deadlines both interests have created for themselves. Unless Fig starts picking up some support from the industry, the more widely accepted ISO 17442 standard is likely to be the accepted mode by the end of 2012, if it isn't already -- with the Financial Stability Board recently adding its endorsement of the 20-character version as well.