Michael Shashoua: Confounding Interests

The developments in the saga of the legal entity identifier (LEI) continue to yield surprises. I wrote in March that coordinating the LEI with other identifiers could make it more effective and give it a smoother path to implementation. The latest changes in LEI governance and data management make it clear that path will remain rocky because differences between national LEI standards persist.

The significance of the Regulatory Oversight Committee (ROC), administrator of the global LEI standard, setting out new principles in late July for pre-local operating units (LOUs), cannot be overstated. The rules forced the US pre-LOU, the Commodity Futures Trading Commission, with its CFTC Interim Compliant Identifier (CICI), to scrap 20 percent of its pre-LEI registrations, removing them from the utility administered by Swift and the Depository Trust & Clearing Corp. (DTCC).

So, the LEI continues to meet global resistance—in this case from the global regulatory body disallowing registrations that were not made by the entity itself or with the entity’s permission. The rationale for instituting the LEI was to be able to track securities and their ownership, so only being able to do so with the permission of the company whose shares are at issue, defeats the functionality of the identifier.

The Special Relationship
The UK and the US—perhaps with a “special relationship” when it comes to the LEI—are responding with the same tack to the international resistance. The London Stock Exchange, which is issuing the UK’s pre-LEI, the Interim Entity Identifier (IEI), says the IEI will comply with ROC guidelines and will allow for portability of pre-LEI records between LOUs (or pre-LOUs).

The US Treasury’s Office of Financial Research (OFR) has proposed an interim system that would make pre-LEIs from any LOU compatible for reporting worldwide. Since these allied nations couldn’t beat the others into accepting their identifier standard, they now propose to join them in devising the standard and implementing it the way the rest of the world wants.

In June 2012, the FSB and the CFTC were batting responsibility for the LEI standard back and forth, like kids in a sandbox.

States and Confusion
This state of affairs leaves it to outside registries to coordinate and consolidate the growing number of types of pre-LEIs—from the US, Germany, France and most recently the UK, with more countries expected to follow. A consortium of independent organizations including GS1, the Corporation for National Research Initiatives, FIX Protocol and consultancy Tahoe Blue, is running P-lei.org, an LEI distribution project that aims to put all the pre-LEIs into a consistent format. It’s curious, to say the least, that this consortium is the body now doing the real work of keeping LEIs organized and consistent, rather than the ROC or its Central Operating Unit. Matters will become more complex as more countries come up with their own pre-LEIs, a scenario that appears increasingly likely.

Looking back over the past two years of the LEI implementation process doesn’t inspire a lot of confidence in the discrepancies being sorted out. Last December, the Financial Stability Board (FSB), which later created ROC to handle the LEI, started to recognize concerns about LOUs duplicating LEIs, and creating inconsistencies. But two-thirds of 2013 have now passed, and the same challenge still exists.

In June 2012, the FSB and the US CFTC were batting responsibility for the LEI standard back and forth, like kids in a sandbox. The CFTC launched its CICI identifier with statements that something had to be done because the FSB hadn’t completed a workable standard. The ROC has struck back, forcing the CFTC into a “do-over.”

Considering all this, it appears that the serious business of getting a workable and consistent identifier to track securities and financial transactions is being managed more like a playground battle, and suffering from political turf wars. Perhaps it’s time to call a “time out” so that everyone can think it over?