To say that the LEI (Legal Entity Identifier) is the Cinderella of regulation is an understatement. It certainly hasn’t captured the attention of financial firms even though regulators are increasingly using the ‘mandate’ stick to encourage take-up. Part of this is down to its stuttering history since the LEI moved from a good idea to reality with the creation of the LEI ISO standard and the GLEIF (Global Legal Entity Identifier Foundation). Equally, it hasn’t helped that the financial industry still has its collective head firmly stuck in the sand regarding the LEI. We would suggest that asset managers should not seek to delay their own efforts by staying with the herd.
Although the take up of the LEI still lags far behind the FSB’s (Financial Stability Board) wishes, regulators are increasingly ‘mandating’ their use. It will become increasingly important for firms to address the LEI challenges if they are going to meet the MiFID II requirements on time.
The following is a summary of some of the challenges asset managers may face:
Uptake: Firms won’t be able to directly force a counterparty to obtain a LEI. Asset managers should communicate, sooner than later, with counterparties to ascertain their LEI status, repeating the mantra from the regulators - ‘no LEI, no trade’.
Verifying: There are several sources to use for verification:
- GLEIF search function
- Reference data vendors
- Counterparties
When using the GLEIF search function it should be noted that some LOUs (Local Operating Unit) store the names of organisations in their local language.
Using the GLEIF site to search the LEI database for RBS, Royal Bank of Scotland & The Royal Bank of Scotland returns 356, 28 and 32 respectively. Needless to say, some entities appear in more than one of the lists. Some are inactive and/or retired and some have lapsed. This is just one example!
Reporting: 8 of the 65 fields required for reporting transactions require an identifier. These will either be a LEI if a legal entity or an acceptable form of ID for individuals. This will require the firm to determine whether an ID or LEI is required as well as sourcing these.
Responsibility: It will be the asset manager’s responsibility to ensure that the correct LEIs are being reported.
Internal Systems: Reconciling LEIs and IDs between siloed systems could be a major headache. The firm will need to ensure that all reporting is consistent across the firm. This may be a particular problem if data is stored in spreadsheets.
Other Regulation: Regulation requiring LEIs will continue to roll out. Asset managers are advised to make sure their change management processes increasingly include a holistic approach to avoid duplication of effort and reconciliation issues.
If a firm has a centralised, firm-wide counterparty database and accompanying robust processes, they will be in a strong position. Not only will this satisfy the regulators but also internal risk and compliance departments.
Asset managers without strong processes in place, who store information in numerous application specific silos, including data in spreadsheets, will find that complying with the regulators’ LEI requirements a huge task.
Firms will not only have to source the LEI for counterparties but also ensure that the LEI information remains up to date and correct. If an LEI has lapsed or becomes inactive it will be in an asset manager’s interest to check and understand why. Putting in the effort now will pay dividends in the future as well as keeping fines at bay.
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