Michael Shashoua: Dueling LEI Standard Proposals

Recently, a challenger to the prevailing and most widely accepted standard for the legal entity identifier (LEI), the ISO 17442 standard, surfaced. Financial InterGroup (FIG) proposed an 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 that FIG is challenging is alpha-numeric with 20 characters. How can a challenger to ISO 17442 be successful with fewer characters available, and therefore less flexibility to accommodate more legal entities, should these grow in number more than expected or imagined?

Rivalry between FIG and those backing and implementing ISO 17442—the Global Financial Markets Association (GFMA), Swift, DTCC and Avox—has already been in play. Last August, I noted that FIG and GS1, a standards organization that was working with FIG until last autumn, were still pushing their registry even after the GFMA threw its support behind the other standard. That 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 Office of Financial Research in 2011. FIG doesn’t have that direct experience in the financial markets,” says Aite Group analyst Virginie O’Shea. “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 will be more willing to go with a body such as ISO, rather than a completely new entity that’s outside their frame of reference.”

A Question of Characters
Having more characters could make the standard difficult to adopt within certain back-office systems, especially if they are legacy systems, but that is not the only consideration for LEI. “Twenty characters is long, but there are longer ones out there,” she says, noting the alternative instrument identifier that can run up 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. But it should not impact its adoption in regulatory reporting terms.”

The 20-character length is tied to the need to avoid running out of potential identifying numbers. “If you are trying to cover all firms in financial services, 11 characters may not be enough. It depends on how far regulators and the industry want to take it,” she says.

ISO’s connection to the industry is evident in the ISO Technical Committee for Financial Services that includes industry professionals such as its chair, Karla McKenna, director of market practice and standards in Citi’s global transaction services unit. McKenna has 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 August 2011.

The ISO standard offers two levels: legal entities and instrument funds. The FIG standard has two parts: registration identification and the LEI extension. So does the FIG standard have better means for matching? Is the ISO standard more innovative?

It will take time to answer these questions, but not much, with the looming deadlines both interests face. Arguments on both sides could be made, as the industry is seeing again with the number of characters to comprise the LEI becoming a question for debate. Still, unless FIG starts picking up support from the industry, the more widely accepted ISO 17442 standard is likely to be the chosen mode by the end of 2012, if it isn’t already.