Are You Ready to Implement the Legal Entity Identifier?

Transcription

1 Are You Ready to Implement the Legal Entity Identifier? A Practical Strategy and Plan A whitepaper by First San Francisco Partners 2013 Copyright First San Francisco Partners

2 Demystifying Legal Entity Identifiers The financial crisis of 2008 clearly underscored the need for greater transparency and regulation in the financial markets. The inability to uniquely identify financial counterparties makes it extremely difficult for financial firms to develop a consistent and integrated view of their exposures, such as in the case of default of counterparty. This is a challenge not only for firms, but it also creates an obstacle for regulators who need to aggregate and share information to effectively monitor risks. To address these challenges, regulators and financial industry groups are driving the creation of a universal and unique, global legal entity identifier (LEI) standard. Identifiers for entities already exist in the financial services industry. Business Identification Codes (BICs), which are unique IDs associated with single entities, are one example. What s missing, then? The problem is there is no internationally developed and accepted LEI standard. In the absence of a universal system of identifying legal entities, private firms and regulators have created a variety of different legal identifiers. This approach has proved expensive, inefficient and, more importantly, ineffective. What Is the Unique Legal Entity Identifier? The objective of the LEI initiative is to ensure that a unique identifier for each corporate entity exists allowing financial regulators to perform more precise analyses of financial companies and their counterparties and allowing them to better ascertain risk. For financial risk managers, the identifier will enable them to better determine risk exposures with their own counterparties across the globe. Any corporation or enterprise involved in both domestic and international financial transactions would need to have a new, unique legal entity identifier. Why Now? Over the last five years, the global financial industry has been faced with greater challenges than ever before. Regulators are mandating more transparency of financial information, resulting in changes to financial measurement, reporting and monitoring. Companies involved in financial risk exposures are now required by regulators to carry enough capital to cover the risks they take. Regulators and risk managers are faced with challenges associated with ascertaining risk, performing precise analyses and determining the correct risk exposures. There is also increased investor and shareholder scrutiny of a company s financial statements and controls. The lack of a unique standard to identify financial counterparties makes it challenging for financial companies to develop a unique, consistent, reliable and integrated view of their exposures, such as a non-compliant counterparty. The lack of a unique standard also creates difficulty for regulators to collect, aggregate and share information to efficiently monitor risk. Page 2

3 For example, a financial company (let s call it International Bank) can have several IDs to identify the bank: FDIC Certificate ID, SWIFT ID, CUSIP ID, etc. All of these IDs are different and uniquely identify the corporate entity for that transaction purpose. And, they are based on the entity s address. Looking at a listing of banks, there could be 15 banks named International Bank, and there could be 100 banks with a variant of the name International. To identify the correct corporate entity and to combine data from different sources, a data manager would need the mappings of all possible identities. A global and unique Identifier needs to be truly unique, and it needs to persist universally across all sources and transactions. It cannot be based on address since addresses can change. ISO standards are needed to build some relationships and linkage between data from different sources. In addition, further complexity results if changes are made to address, name, or organizational type, or when there are changes due to corporate actions, such as mergers and acquisitions, that result in multiple modifications. Tracking the surviving entity of a merger becomes very complex. To address these challenges, a global LEI framework has now been created. The LEI standard is persistent, neutral, singular, unique, extensible, structurally fixed, reliable and interoperable. Following a robust ISO process, ISO Standard was created and made publicly available in May Benefits for All Regulators, risk managers at financial institutions and even financial institutions will benefit from this standard. Regulators gain a more accurate analysis of global financial institutions and their transactions with all counterparties across markets, products and regions. Risk managers gain the ability to more effectively aggregate their global exposures to counterparties. Financial institutions benefit from a reduced cost of data management. It has been estimated that financial services firms spend approximately US$250M annually cleansing and maintaining entity information. Thus, firms will eventually realize a positive ROI to replacing their own internal identifiers with the standard LEIs. The challenge now is for financial institutions to strategize and develop an action plan to modify systems and processes to prepare for implementation of the new LEI standard. Page 3

4 LEI Standard Preliminary Implementation Plan Phase 1 of the implementation involves developing: A list of targeted entity classes. The industry requirements stipulate that any legal entity that enters into a financial transaction including transacting entities, issuing entities, reference entities, reporting entities and ultimate parent entities will be eligible for an LEI. A list of the data that the Draft ISO LEI Standard requires to be provided on each LEI record. A description of a new web portal being built to support registration and validation of legal entity data. Principles guiding the planned LEI infrastructure, which includes the LEI Database being available free of charge to all users, including commercial data vendors, without the need for licensing and with no restrictions on usage. Phase 1 components and details, including field classifications, process scenarios and record states. Planning for LEI Leverage Your Existing Enterprise Data Management Framework Since a common LEI standard will be administered across one or more entities, financial institutions must consider readying themselves today to create, accept and internally process the common identifier. As with other industry mandates, further details will be published on the global LEI initiative along with the required standards and implementation dates. Better to start preparing now rather than be scrambling to ensure compliance at the last minute. Financial institutions can lay the groundwork today to be ready for the mandate, even though the implementation details have not yet been finalized. To be ready for LEI, financial companies should be reviewing their overall Enterprise Data Management (EDM) strategy and framework. Now is the time to assess the quality and comprehensiveness of your existing EDM framework and to determine what is required to meet the needs of the LEI initiative. Assessing Your Readiness for LEI Companies should have a practical understanding of their existing EDM strategy and framework. Data quality, master data management, metadata management, data warehousing architecture and data integration are all pieces of the data management puzzle. Has your enterprise assembled these pieces into a cohesive and coherent picture such that implementing LEI will be seamless? Will you need to update your EDM framework to implement LEI effectively and efficiently? Page 4

5 Below are a number of ways to help you assess your readiness to implement LEI: Review data quality, integrity and completeness: Is data cleansed to eliminate duplicate records? Is existing data accurate across systems? Do you know which record is the primary source of truth? Is there complete data about the existing relationships between entities? Review the mapping of data flows between systems and develop a greater understanding of data sharing and replication across systems. Review the existing data governance program to include updated quality metrics and standards. Further develop quality metrics and standards related to LEI. A robust Enterprise Data Management framework can ensure that LEI requirements are met, and it can ensure LEI is managed and governed appropriately. But such a framework must be based not only on technology but also on people and processes to ensure there is control over the structure, processing, delivery and usage of information. An EDM framework is required to ensure adherence to industry mandates and for factbased decision making a key tenet of corporate agility. A strong EDM framework also ensures that business stakeholders can trust the data. An Enterprise Data Management framework that will meet LEI s requirements should include: Data Governance Roles and responsibilities e.g. centralized reference data teams Ownership and accountability Standard operating procedures Policies, processes and standards Operating model type hybrid, federated or centralized approach Issues resolution and escalation process (arbitration process) Service level Agreements (SLAs) Reference Data Management Identification of reference data e.g. official name of the legal entity, headquarters address of the legal entity, address of the legal formation, Page 5

6 date of the first LEI assignment, date of the last LEI update, date of expiry, reason for expiry (if applicable) and LEI that acquired the expired LEI Reference data approach to aggregate data federated model approach is recommended to pull all the data together Metadata Management (The who, where, when and how of data attributes) Definition Traceability and auditability LEI Architecture Data architecture Systems architecture Data integration Data Quality CRUD (Create, Read, Update, Delete) Data certification Data access and distribution Data cleansing and remediation Data quality standards Hierarchy Management Hierarchies can be used for legal and performance grouping Hierarchy management will make all the difference. The LEI, alone, is just a legal name and address. What is the corporate hierarchy structure for AML, provision of credit or Basel? There cannot be only one version for all of the functional areas. Each area will require its own hierarchy. Page 6

7 Conclusion While there are still many details to be worked out for the global LEI initiative, the time to start preparing for LEI is now. Only with a single, universal LEI standard will global regulators, supervisors, and private firms be better able to measure and monitor systemic risk and counterparty exposure. However, LEI in itself is not going to be enough. The implementation of LEI should be considered as part of a larger data plan. It will be important for a company to determine how they are going to manage their existing processes and infrastructure based on the new requirements. If LEI becomes a data service sold by a regulator, how will the company integrate it? Do they already have an internal, unique LEI approach? If so, how will this approach change (or not) with the new regulations? If an organization doesn t have an internal, unique LEI approach, then evaluating and establishing a plan for implementing LEI will help a company be prepared for any externally mandated LEI. Data must be a strategic priority to a company. LEI can be used as an initiative and impetus to drive standards within the organization and as a foundational piece to building better risk management tools. Don t wait. Review your enterprise data management framework now and be prepared for LEI. Author: Kelle O Neal As Founder and Managing Partner of First San Francisco Partners, Kelle O Neal manages specialist data governance and data management consulting services to complex organizations that deliver faster time-to-results. Kelle can be reached at kelle@firstsanfranciscopartners.com or through First San Francisco Partners Website ( For more information please visit or call Page 7