The Global Legal Entity
Identifier: Will it Deliver?
Alistair Milne
Professor of Financial Economics
School of Business and Economics/
Co-director Centre for Post Crisis Finance
Our research
• Alfred P. Sloan Foundation Grant
• Stage 1: Interviews with data management
professionals
• Leading firms
• Independents
• Goal: investigate costs and benefits of the LEI
• Subsequent work on use in counterparty risk
management and in resolution of failed firms
The creation of the LEI
• US
• Dodd-Frank
• Financial Stability Oversight Council
• Office of Financial Research
• Globally
• G20/Financial Stability Board
• Coalition of global regulators
• Private Sector Preparatory Group
• Initial application (Dodd-Frank/EMIR)
• Reporting OTC derivative trades to trade repositories
Global governance
Interviews
• five senior data managers in the major global
investment banks and seven industry experts
working for advisory firms or consultancies (most
of whom are active in the LEI PSPG).
• Interviews lasted between 30 minutes and 70
minutes and were organised around three “initial
questions”:
Three thematic questions
• What are the major cost, efficiency and riskreductions achievable from using LEI?
• How important is it to have good hierarchy
reference data as part of the LEI in order to
achieve these benefits?
• Should this ownership hierarchy be provided by the
LEI system?
• Can LEI help with compliance costs of current
regulations on OTC markets (Dodd Frank in the
US, European Market Infrastructure Regulation
EMIR in Europe)?
Interviewees on benefits (1)
• Improved client data management
• Client on-boarding.
• Updating of client information.
• Observation of anti-money laundering (AML )
regulations.
• Better client relationship management.
• Straight through processing
• Reducing failures in post-trade order matching,
clearing and settlement.
Interviewees on benefits (2)
• Tax, management and regulatory reporting
• Compliance with tax reporting requirements (FATCA)
• Regulatory reporting requirements.
• large exposure limits, eg. takeovers or divestments
• Buyside services
• Allocation of block or automated trades / also for
security underwriting
• ethical and other investment mandates.
• Maintaining separation of client accounts.
• ? corporate actions.
Interviewees on risk management
• Relatively short list
• Frequent mention of monitoring of positions in failure
situation e.g. Lehman Brothers
• longstanding efforts to build internal systems of
legal entity identifiers within their firms,
• 2002 A-Team/ Reuter’s study that found that 65% of
firms had their own central reference data system.
• These systems already give them a broad
understanding of their counterparty exposures
• stretched when it comes to dealing with the
practicalities of actual default.
• Little reported relevance to e.g. CVA
Interviewees on heirarchies
• Confirmed complexity of challenge
• No unique solution
• Wide range of different views
• LEI stick to core task unique numbering
• hierarchy information should be left to third party vendors
• LEI can provide easily verified hierarchy
information, To overcome gaps/inaccuracies in
vendor information
• Eg
• percentage of share ownership held by other LEI entity
• name and registered address of shareholders.
Private v. Social benefits
• Private benefits
• Removal of duplication
• Customer on boarding
• Know your customer
• Anti Money Laundering
• Lower costs of regulatory reporting
• Social benefits
• Transparency
• Risk aggregation
• Monitoring systemic risk
Quantifying benefits to industry
• To an ‘order of magnitude’ : $10bn per annum of
measureable direct operational cost savings in
wholesale financial markets.
• Further indirect private benefits can eventually be
expected
• Within wholesale markets
• In other banking applications
• There is also a bigger picture. Only one specific
aspect of referencing, information management
and messaging standards in financial services.
Rationale (only partly based on interviews)
• Expenditure on external data. Inside Market Data
(2006) total industry spend $13.6bn in 2004
• Internal data management costs.
• KYC and AML also trade execution and processing.
• Headcount in larger firms devoted to these activities is
in excess of 1,000 employees,
• > $100mn per firm; > 10bn across the industry.
• Grody, Harmantzis, and Kaple 2007 pg27: $12bn per year.
• Operational automation
• Grody, Harmantzis, and Kaple 2007) around $3bn in
the largest 15 US firms
Regulatory compliance
• Agreement in principle that will help
• Doubts about practice
• Lack of clarity about use beyond Dodd-Frank/EMIR
Conclusions
• Private benefits of LEI
• “back of the envelope” $10bn
• Much of this in KYC
• Not being stressed by ROC
• Social benefits
• Tranparency for regulators
• Part of a bigger picture of technoogical transformatio
of the industry