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Connect the Corporate Dots Globally with the Legal Entity Identifier: A Progress Report on Collecting Data on ‘Who Owns Whom’
GLEIF will launch a prototype exercise with five ‘first mover’ LEI issuers by the end of 2016
Author: Stephan Wolf
Estimated Reading Time: 12 minutes
The Global Legal Entity Identifier (LEI) System is designed to ultimately help answer three questions: Who is who? Who owns whom? And who owns what? In other words, the publicly available LEI data pool can be regarded as a global directory, which greatly enhances transparency in financial markets.
The information available with the LEI reference data to date, e.g. the official name of a legal entity and its registered address, is referred to as ‘Level 1’ data. It provides the answer to the question of ‘who is who’. In a next step, the LEI data pool will be enhanced to include the ‘Level 2’ data that will answer the question of ‘who owns whom’.
As previously reported in a related Global Legal Entity Identifier Foundation (GLEIF) blog post, dated March 2016, the LEI Regulatory Oversight Committee (LEI ROC) published the document, entitled ‘Collecting data on direct and ultimate parents of legal entities in the Global LEI System – Phase 1’.
GLEIF is responsible for carrying out the project management and developing the organizational and technical standards required by the LEI issuing organizations to collect the parent information. This blog post provides a progress report on project rollout and informs on next steps.
Sources cited in this blog post are included in the ‘related links’ below.
Outlook: Connect the corporate dots globally with open, standardized and high quality LEI data
In the article headlined ‘Connect the corporate dots to see true transparency’, the Financial Times recently recalled that “regulators struggled to cope with the fallout from the Lehman Brothers collapse in 2008 because the bank was operating almost 3,000 different legal entities around the world”. What is needed “is a way for analysts to track the connections that exist between companies scattered across different national jurisdictions. (…) Many of these are listed on national registries but, since registries are extremely fragmented, it is very difficult for shareholders or regulators to form a complete picture of company activity.” The good news, the Financial Times concluded, “is that with every data scrape, or use of an LEI, the picture of global corporate activity is becoming slightly less opaque thanks to the work of a hidden army of geeks.”
Starting in early 2017, GLEIF will publish relationship data, which allows the identification of direct and ultimate parents of a legal entity and, vice versa, in order that the entities owned by individual companies can be researched.
This data will be made available with the Global LEI Index, which consists of a golden copy of all past and current LEI records including related reference data in one repository. Any interested party can easily access and search the complete LEI data pool using the web-based LEI search tool developed by GLEIF.
In a nutshell, by publishing data clarifying who owns whom, GLEIF will provide a unique and free data source that allows corporate dots to be connected globally based on open, standardized and high quality LEI data.
Recap: The principles governing the collection of data on direct and ultimate parents in the Global LEI System
The main features of the LEI ROC document ‘Collecting data on direct and ultimate parents of legal entities in the Global LEI System – Phase 1’ are summarized as follows in the report:
An incremental approach: The document identifies the priority features that should be part of the first phase of this data collection, with the objective of starting implementation around the end of 2016. Adding data on parent entities was envisaged in the 2012 Financial Stability Board recommendations on the LEI and would augment the usefulness and attraction of the system for users. At the same time, the system is still at an early stage of development, with some 460,000 entities worldwide having acquired an LEI as of September 2016. The proposal seeks to avoid imposing unwarranted costs or complexities that could be detrimental to the expansion of the system. The LEI ROC is aware that this first phase may not meet all the needs expressed in earlier related consultations and will work on expanding the scope of relationship data in future phases, in consultation with relevant stakeholders.
Entities that have or acquire an LEI would report their ‘ultimate accounting consolidating parent’, defined as the highest level legal entity preparing consolidated financial statements, as well as their ‘direct accounting consolidating parent’. In both cases, the identification of the parent would be based on the accounting definition of consolidation applying to this parent.
Accounting definitions were chosen as a starting point as the LEI ROC concluded that their practical characteristics outweighed limitations caused by the fact that they are designed for a different purpose, i.e., to report relationships to investors on a going concern basis. These practical characteristics are that: (i) they are applicable to both financial and non-financial companies; (ii) their international comparability has increased, following greater convergence between IFRS (International Financial Reporting Standards) and US GAAP (Generally Accepted Accounting Principles) on the scope of consolidation; and (iii) they are widely used, publicly available and their implementation is periodically reviewed by external auditors.
The information collected would be published in the Global LEI System and therefore freely available for public authorities and market participants. However, to allow examining issues associated with collecting data on parents that do not have an LEI, data related to parents without an LEI will initially not be published. At this stage, the Global LEI System will only record relationship data that can be made public, in accordance with the applicable legal framework.
Entities would report relationship information to the LEI issuing organizations of the Global LEI System, who would verify the relationship information based on public documents if available (e.g., list of subsidiaries in audited consolidated financial statements; regulatory filings), or other sources.
Information on parents would be part of the information that must be provided in order for an LEI to be issued or renewed, but with the option to decline providing this information for the reasons detailed in the LEI ROC’s report.
GLEIF will launch a prototype exercise with five ‘first mover’ LEI issuers by the end of 2016
It is important to note that there will be no Big Bang rollout of Level 2 data, but a phased approach. GLEIF plans to launch a prototype exercise together with five volunteering ‘first mover’ LEI issuing organizations (also referenced as Local Operating Units or LOUs) by the end of 2016 to demonstrate the end-to-end process of Level 2 data collection, validation and publication. The LEI issuers participating in the prototype exercise are: Bundesanzeiger Verlag GmbH (Bundesanzeiger Verlag), GMEI Utility, London Stock Exchange, Saudi Arabia Credit Bureau and Unione Italiana per le Camere di Commercio, Industria, Artigianato e Agricoltura.
LEI issuing organizations act as the primary interface for legal entities that have registered, or wish to obtain, an LEI.
GLEIF encourages firms that have already registered an LEI to proactively make Level 2 data available to their managing LOU.
Parent information for the entire LEI data pool is expected to be available at the start of 2018
In early 2017, GLEIF will start publishing, in a first step, Level 2 data collected by the volunteering LEI issuers participating in the prototype exercise. The mandatory collection, validation and publication of parent information will commence on 1 April 2017. As of this date, all LEI issuers are expected to have the capability to register and renew LEIs including Level 2 data. It is expected that Level 2 data for the entire LEI population will be available at the latest at the start of 2018, i.e. towards the end of the one-year renewal cycle after the date when mandatory collection of Level 2 data starts.
To date, LEI data records are published with the daily updated ‘GLEIF Concatenated File’. This file contains the content of the individual files, published by the LEI issuing organizations, which list all LEIs issued to legal entities and related LEI reference data, i.e. Level 1 data on who is who. Level 2 data on who owns whom will be published with a separate file on the GLEIF website. This avoids any disruption to the established use of Level 1 data by market participants.
Distinct procedures apply regarding direct and ultimate parents with and without an LEI
With regard to the parent information related to firms that have obtained an LEI, the following has to be kept in mind: The direct and ultimate parents of an LEI registrant may or may not have an LEI. Distinct procedures will apply regarding the collection, validation and publication of parent information subject to whether the parents have an LEI or not.
If the direct and / or ultimate parent of an LEI registrant has obtained an LEI, the following applies: The child legal entity will be obliged to provide the LEI, respectively, of its direct and ultimate parent to the LEI issuing organization. The separate file to be published on the GLEIF website providing parent information will contain the LEI of the child entity as well as the LEIs, respectively, of the direct and ultimate parent.
If the direct and / or ultimate parent of an LEI registrant does not have an LEI, the following applies: The child legal entity will be obliged to report reference data on its direct and ultimate parents to the LEI issuing organization in accordance with the new ‘Parent Reference Data Format’ (see below). The LEI issuing organization will issue a ‘Provisional Node Identifier’ (see below) for the ultimate and direct parent, respectively, that does not have an LEI. During an initial phase, the reference data reported by a child entity for its direct and ultimate parents and the Provisional Node Identifiers issued for the parent entities will not be published.
The LEI ROC policy paper on collecting relationship data within the Global LEI System specifies with regard to direct and ultimate parents of LEI registrants that do not have an LEI: Initially, “the public reference data of the child entity would only mention that there is a parent, but that the parent does not consent to have an LEI or could not be contacted.” Three specific rules would apply to the data collected on parents without LEIs (parent metadata):
“There would be no other verification of the parent metadata than the documents already used to establish the relationship, to avoid excessive costs to the Global LEI System compared to the situation where the parent LEI is provided.” This information would help LEI issuers verify, at least on an annual basis, that the parent does not have an LEI unknown to the child.
“The absence of publication of the parent metadata and of relationships between child entities based on this parent metadata, would provide additional time to review, based on real cases, whether publication would harm the Global LEI System, including concerns that this lower quality data may affect the reputation of the Global LEI System and the adoption of the LEI.”
For as long as metadata on parents will not be published, this data will only be accessible to GLEIF and LEI ROC members.
The LEI ROC policy further clarifies that no later than six months after the start of the effective collection of relationship data by LEI issuing organizations, the LEI ROC “will determine whether the parent metadata can be made public as part of the reference data of the child” or whether additional time would be required “to address any issues associated with publication, with the expectation that publication will take place as soon as feasible.”
Technical documentation related to collecting parent information in the Global LEI System now under development
GLEIF is currently in the process of developing, in consultation with the LEI ROC and the LEI issuing organizations, the organizational and technical standards required to collect data on direct and ultimate parents of legal entities in the Global LEI System. Details are set out in the following draft documents:
Draft Relationship Record Common Data File (RR-CDF) Format: This document defines the technical format which specifies how Level 2 data, i.e. relationship records, is stored and transferred between LEI issuing organizations and GLEIF. GLEIF will publish Level 2 data on its website in this technical format.
Draft State Transition Rules for the Relationship Record Common Data File Format (Including Validation Rules): This document defines general business rules to be observed by LEI issuers collecting Level 2 data and provides specific instructions on how to apply the ‘Relationship Record Common Data File Format’. The validation rules describe aspects to be considered by LEI issuing organizations in the process of validating accounting consolidation relationships.
Draft Parent Reference Data Format: This document defines the technical format which specifies how reference data for parent entities without an LEI is stored and transferred between LEI issuers and GLEIF. It is based on the existing LEI Common Data File format, which defines how LEI issuing organizations report their LEIs and legal entity reference data. As mentioned above, this parent reference data will not be publicly available during the pilot phase.
Draft Provisional Node Identifier (PNI) Code: This document defines technical identifiers to address parent entity records (for parents without an LEI) stored in the ‘Parent Reference Data Format’. PNI codes are based on International Organization for Standardization (ISO) 17442 identifier specifications. As mentioned above, the PNI codes will not be publicly available during the pilot phase.
GLEIF has made available the draft versions of the documentation listed above for information (see ‘related links’ below). The final versions of this documentation is scheduled for publication in November 2016.
GLEIF will continue to provide regular updates on the progress towards enhancing the LEI data pool to include information on who owns whom going forward.
Stephan Wolf is the CEO of the Global Legal Entity Identifier Foundation (GLEIF). Since January 2017, Mr. Wolf is Co-convener of the International Organization for Standardization Technical Committee 68 FinTech Technical Advisory Group (ISO TC 68 FinTech TAG). In January 2017, Mr. Wolf was named one of the Top 100 Leaders in Identity by One World Identity. He has extensive experience in establishing data operations and global implementation strategy. He has led the advancement of key business and product development strategies throughout his career. Mr. Wolf co-founded IS Innovative Software GmbH in 1989 and served first as its managing director. He was later named spokesman of the executive board of its successor IS.Teledata AG. This company ultimately became part of Interactive Data Corporation where Mr. Wolf held the role of CTO.
Tags for this article:
Legal Entity Identifier (LEI), LEI Regulatory Oversight Committee (LEI ROC), Global Legal Entity Identifier Foundation (GLEIF), Data Quality, Data Management, Standards, Level 2 / Relationship Data (Who Owns Whom)