The Global Legal Entity Identifier (LEI) System: A Look Back and a Look Ahead
The Chairman of the LEI Regulatory Oversight Committee highlights progress achieved and actions now in the pipeline to further promote growth and usability of the system
Author: Matthew Reed
The Global Legal Entity Identifier System operates in three tiers
As 2015 comes to a close, we have an opportunity to reflect on the Global Legal Entity Identifier (LEI) System, where it stands, and where it will go.
The LEI story is a good one. In 2012 a group of authorities from around the globe decided we needed to solve a ’collective action’ problem that had been vexing to the industry and regulators for decades: how to develop and implement a common entity identification system that could serve as a linchpin to identify financial market participants and connect data. We realized the system needed to help answer three basic questions: Who is who? Who owns whom? And who owns what?
We also concluded that the system needs three basic features: ubiquity, persistence and accessibility. Ubiquity is necessary so that data can be combined and interoperated regardless of who generates it or where it resides. Persistence is critical so that it can be relied on year over year, through firm mergers, acquisitions and wind-downs. Accessibility is required so that firms, authorities and the public can obtain this critical linchpin information about the entities operating in global financial markets.
Governance of the system and buy-in from the private sector became paramount for incorporating these features. Working through the Group of 20 (G20) and the Financial Stability Board (FSB), and later the LEI Regulatory Oversight Committee (ROC) overseeing the system, we are obtaining ubiquity. As of this writing, more than 80 authorities from 50 nations — far beyond the membership of the G20 — work together to steer the system for public good. A ’push’ from the public sector also helps achieve persistence (by requiring use of this new LEI code) and accessibility (by designing a funding mechanism that avoids pay-for-use). As a result, LEI ROC member authorities have written more than 30 rules calling for the use of the LEI in reporting and trading.
The LEI was designed to serve private as well as public interests
It was clear since the inception of the initiative that the public sector would not and should not achieve these characteristics alone and thus we sought private sector engagement. First, we engaged the International Organization for Standardization, a consensus standards organization known as ISO, to develop what is now the LEI standard, ISO 17442. This standard signaled that the LEI was designed to serve private as well as public interests, and could be universally embraced. Beyond that members of the private sector were encouraged to participate in our reflection through the Private Sector Preparatory Group.
Later, we facilitated the creation of a few (now more than a few dozen) utilities to work directly with market participants to assign LEIs. These utilities — known as local operating units — help us achieve persistence and accessibility by managing the LEI data through its lifecycle (and thereby avoiding duplication), and making the data universally accessible through a free, downloadable global database.
On top of that, we created and now oversee the ’glue’ of the system: the Global LEI Foundation (GLEIF). GLEIF coordinates and oversees the local operating units, so that the public interests enshrined in its organizing statutes are preserved, and helps the LEI ROC develop and implement new standards related to entity identification.
The next step: capturing information about ownership of firms
We are now approaching the end of my three-year tenure as Chair of the LEI ROC, and those of the LEI ROC Vice Chairs, Bertrand Couillault from the Banque de France and Jun Mizuguchi from the Japanese Financial Services Agency.
In the 18 months since the creation of GLEIF, we have made significant progress. GLEIF takes its responsibility to uphold public interest principles seriously. As it increases its capacity, GLEIF is also increasing its focus on data quality. Its master agreement with the local operating units to govern their relationship contains critical tools to ensure that data produced by the system is publicly available and that the system is flexible enough to accommodate growth and penetration into the remote reaches of the global financial system. GLEIF has also launched a reliable, fully downloadable and searchable database that seamlessly combines records from the 27 local operating units on more than 400,000 companies. And it is building its standards-implementing capabilities.
Now that GLEIF has reached an operational steady state capable of managing the system, the LEI ROC will focus on two principal tasks: (1) overseeing the system so that it continues to serve its important public purposes and (2) defining policy requirements to be implemented by GLEIF. Some of the policy work involves refining or clarifying the LEI standard so the local operating units and LEI registrants understand which entities — whether sole traders or branches — are eligible for an LEI. This work is critical for the system to continue to meet public and private sector needs, and is administered evenly across the globe.
Perhaps the most important policy standard now under LEI ROC consideration answers the ’Who owns whom’ question I mentioned earlier. In October 2015, the LEI ROC released a consultative document describing how we might initially capture information about ownership of firms, and we are now in the process of evaluating the public’s responses. We expect to release more news in the new year.
Ensuring broad LEI coverage remains a priority
Another priority for the LEI ROC — and for GLEIF and other system partners — is achieving broad LEI coverage. Currently, about 400,000 LEIs have been issued to firms in more than 180 countries. This adoption is significant for a standard only a few years old. But we can, and expect to, do more through regulatory adoption of the LEI and voluntary adoption by firms. We think this goal is achievable because, after all, the LEI is a standard built by and for the industry it covers.
In the next few years, look for a significant increase in the coverage and value of the LEI system.
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Matthew Reed is Chief Counsel for the Office of Financial Research at the U.S. Department of the Treasury. In this capacity, he serves on the senior management team for the Office established to conduct financial stability monitoring and analysis, and is responsible for overseeing all legal activities of the Office. In January 2012, he was selected as the inaugural Chairman of the Regulatory Oversight Committee of the Global Legal Entity Identifier System, made up of more than 80 authorities from around the globe to oversee the Global LEI Foundation and the broader system. Mr. Reed's previous public service work included senior roles at the U.S. Securities and Exchange Commission, and as a lawyer in the U. S. Senate and the U.S. Department of Justice. Mr. Reed graduated with high honors from the George Mason School of Law and served on its law review.