Michael Shashoua: Solving For LEI

Spirited chatter on Inside Reference Data’s LinkedIn discussion group last month shows conflict over the new legal entity identifier (LEI) standard, the International Securities Identification Numbers (ISINs), and the Stock Exchange Daily Official List (Sedol) identifiers used in the UK.

This conflict is around speculation that the global LEI system to be implemented this year will not work with certain data standards which LEI administrators deem “non-eligible,” including Committee on Uniform Security Identification Procedures (Cusips), ISINs, Sedols and Reuters Instrument Codes (RICs). Should that be the case, it would be difficult to establish the sort of links between the LEI and other identifiers envisioned in this column recently.

“In best business practice, this topic is not solved to my understanding at all,” says Bruno Schuetterle, a member of Sipug, the Zurich-based Swiss identification procedures administrator. He asks: “Do you think the global LEI system will take contractual measures not to deliver LEIs to vendors that are in the status of non-eligible vendors?”

Intellectual property issues also surround the issue of eligibility, adds Schuetterle. The Cusip Service Bureau (CSB), Thomson Reuters, the London Stock Exchange and others who maintain that their identifiers are their own intellectual property are unlikely to soften that stance. This is similar to LEI administrators’ unyielding position on data standards’ eligibility.

Comparing LEIs and ISINs
In November 2011, the European Commission abolished licensing fees for using ISINs, with cooperation from Standard & Poor’s. Participants in the discussion criticize the effectiveness of the EC action.

LEI implementation issues aren’t as simple as just proving the costs will have benefits. There’s an underlying thicket when it comes to coordinating the LEI with other identifiers.

“The CSB is not implementing the EC ISIN decision in good faith,” says Rudolf Siebel, vice chair of the Securities Market Practice Group and a managing director at Frankfurt-based asset management firm, BVI. This creates concern about being able to combine the LEI and ISIN codes, adds Siebel. The EC’s decision did not bring “any cost reduction at all” for identification code implementation, according to Schuetterle, who adds that the Commission ought to follow up on why that desired result did not come to pass.

Nonetheless, those cost concerns could become moot, if identifiers evolve so that the LEI ends up supplanting the ISIN and other initiatives. The need to map out identification through the use of both the LEI and the ISIN standards is likely to eventually fade out, according to Graeme Austin, CEO of ISITC Europe. That, in turn, could solve the intellectual property and fees issues, as adoption of the LEI will “push those who seek to charge firms to use poor identifiers of legal entities to reassess their commercial models,” Austin says. “I believe the Global LEI System is a game changer, and not just another of the many hoped-for industry data utilities that have come unstuck by vested interests.”

Dumb Number
Both Siebel and Austin maintained in the discussion that the LEI must remain a “dumb number,” meaning that country-specific or other informational elements should not be included in the LEI number itself. Fund entities do not necessarily remain within one country’s jurisdiction and can be multinational, so a country information element in the number, says Siebel, would not be “stable.”

LEI implementation issues, as this discussion makes clear, aren’t as simple as just proving the costs will have benefits. There’s an underlying thicket when it comes to coordinating the LEI with other identifiers. Coordinating identifiers is a path to making the LEI more effective, as I argued in this space last month, but before that can be done, all the aforementioned interested parties will have to reach an understanding for a basic functional identification system.