Financial Stability Board’s (FSB) New Peer Review on LEI Implementation: Reaffirms Substantial Benefits of LEIs and the FSB’s Commitment to their Broader Use Globally
GLEIF welcomes FSB recommendations to expand LEI adoption and fully realize its benefits for authorities and market participants
Author: Stephan Wolf
Estimated Reading Time: 9 minutes
The Financial Stability Board (FSB) recently published a new Thematic Review on Implementation of the Legal Entity Identifier (LEI). The objectives of FSB peer-led thematic reviews are: to encourage consistent cross-country and cross-sector implementation; to evaluate (where possible) the extent to which standards and policies have had their intended results; and to identify gaps and weaknesses in reviewed areas and to make recommendations for potential follow up by FSB members.
Since the peer review provides an objective assessment of LEI implementation, and the resulting recommendations are intended to address the issues identified and promote broader LEI adoption, there is great value to LEI stakeholders in familiarizing with its content. As such, the aim of this blog is to distill the key findings and recommendations with a view to supporting the FSB in ‘spreading the word’ among LEI stakeholders globally.
The FSB is an international body that monitors and makes recommendations about the global financial system. The FSB promotes international financial stability; it does so by coordinating national financial authorities and international standard-setting bodies as they work toward developing strong regulatory, supervisory and other financial sector policies. It fosters a level playing field by encouraging coherent implementation of these policies across sectors and jurisdictions. The FSB is the founder of the Global Legal Entity Identifier Foundation (GLEIF).
LEI usage mandates: Significant benefits for regulators and market participants
The report notes that since the Global LEI System was endorsed by the G20 in 2012, it has been “successfully brought into operation” with over 1.4 million entities using LEIs for unique identification purposes in over 200 countries. It highlights that the majority of FSB jurisdictions have mandated LEI usage in at least one area and that when the LEI has been mandated as part of an international standard-setting effort or across multiple market segments, adoption has been most successful. Widespread coverage has been realized in some financial market segments, including over-the-counter (OTC) derivatives and securities markets. In these areas the LEI has come closest to meeting the G20’s objective to “encourage global adoption of the LEI to support authorities and market participants in identifying and managing financial risks.”
The review emphasizes that there are numerous regulatory uses for the LEI, thanks to its ability to standardize legal entity identification at a global level and so support the management and analysis of large datasets. It also reaffirms the substantial benefits the LEI offers to both regulators and market participants. It states that implementation of the LEI enhances “regulators’ surveillance by tracking market abuse across institutions, products and jurisdictions. The LEI can also assist regulators’ and market participants’ aggregation and more flexible retrieval of granular data on entities from multiple sources […], as well as the analysis of counterparty risks, interconnectedness […] and complex group structures […]. In some jurisdictions, the LEI is also used in reporting to credit registries and for supporting the resolution of banks […] Several financial institutions and trade associations have called on authorities to mandate the use […] of the LEI, both to facilitate regulatory reporting and to increase the efficiency and lower the costs of customer identification, transaction processing and data aggregation.”
Of particular note was the advocacy for the LEI conveyed in the report by many in the financial industry. GLEIF is encouraged that this audience appears to largely recognize both the existing and potential benefits offered by the LEI.
Next steps: To push new boundaries in LEI adoption by addressing obstacles
While there has been progress towards meeting the G20’s objective for the LEI, more needs to be done to increase its usage outside the securities and derivatives markets. This would support new industry or regulatory use cases and could enable a tipping point to be reached, where voluntary take-up by market participants would stimulate further adoption. Advances are also needed in balancing LEI adoption across geographic FSB jurisdictions; coverage is currently concentrated in Canada, the EU and the United States. More efforts are required at both national and international levels to promote LEI adoption and enhance benefits, by addressing the following obstacles identified in the review:
The current business model, which does not clearly align the current benefits and costs of LEI use for particpants.
A lack of LEI coverage for Level 2 (relationship) data.
Insufficient links with other identifiers (in particular business registries).
GLEIF welcomes FSB recommendations
The FSB is unambiguous when confirming its commitment to the broader use of the LEI globally in order to meet the G20’s objective. To support this aim, it outlines four sets of recommendations addressed to: FSB member jurisdictions; the FSB itself; relevant standard-setting bodies and international organizations; and the LEI Regulatory Oversight Committee (LEI ROC) and GLEIF.
The recommendations made to FSB jurisdictions included: strong encouragement for authorities to require the use of LEIs for the identification of legal entities in the data reported to trade repositories for OTC derivatives; potentially requiring the use and renewal of LEIs in reporting or disclosure frameworks for the identification of specified entities; and generally exploring ways to promote further LEI adoption.
With regards to its own responsibilities, the FSB committed to: explore the potential role of the LEI in its work; work with standard-setting and industry bodies to facilitate adoption of the LEI for all group entities and major counterparties of global systemically important financial institutions and clearing members of central counterparties and their ultimate parents; and to facilitate, by working with standard-setting and industry bodies, the effective implementation of the LEI option in payment messages, to help address the decline in the number of correspondent banking relationships.
The FSB suggested that relevant standard setting bodies (Basel Committee on Banking Supervision (BCBS), Committee on Payments and Market Infrastructure (CPMI), International Association of Insurance Supervisors (IAIS), International Organization of Securities Commissions (IOSCO)) and international organizations (International Monetary Fund (IMF), Organisation for Economic Co-operation and Development (OECD), World Bank) should review and consider ways to embed or enhance references to LEI in their work. This is aimed at facilitating the implementation of relevant LEI uses for authorities and market participants.
A summary of the recommendations made to the LEI ROC and GLEIF is as follows:
Consider enhancements to the LEI business model to lower the cost and administrative burden for entities acquiring and maintaining an LEI.
Consider data quality process enhancements to increase the reliability of the LEI data so as to improve its usability.
Work with industry and the public sector to raise awareness of the benefits of the LEI and encourage voluntary adoption.
Enhance the scope and usability of Level 2 (relationship) data.
GLEIF strongly welcomes the recommendations from the FSB and peer review. All efforts which aim to promote LEI adoption globally and enhance benefits to regulators and market participants must be viewed positively and pursued wherever possible.
Data quality management is already central to the work undertaken within GLEIF and the related recommendations have been well noted. An established data quality management program ensures that the LEI remains the industry standard best suited to providing open and reliable data for unique legal entity identification management. GLEIF focuses on further optimizing the quality, reliability and usability of all LEI data – both Level 1 data on who is who and Level 2 data on who owns whom – empowering market participants to benefit from the wealth of information available within the LEI population.
As a next step, GLEIF will review and assess all recommendations with a view to aligning internally on how we can best respond and support the FSB’s aim of broader LEI adoption globally. We look forward to reporting relevant advances as they happen. In the spirit of collaboration, we encourage other LEI stakeholders to fully consider the FSB recommendations. As always, GLEIF fully welcomes cooperation on points of mutuality.
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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.