Breaking Through Barriers Impeding Financial Data Standards

Breaking Through Barriers Impeding Financial Data Standards

The global Legal Entity Identifier (LEI) system is a cornerstone for financial data standards that offers great benefits to industry and government.

Like a bar code for precisely identifying parties to financial transactions, the LEI helps make the torrent of data flowing in the financial system more comparable. It can generate efficiencies for financial companies in internal reporting and in collecting, cleaning, and aggregating data.

The LEI can thus ease companies’ regulatory reporting burdens by reducing overlap and duplication. Many financial firms report data to more than one government regulator, and different regulators have different reporting requirements and different data identifiers.

This lack of uniformity can lead to inefficient, costly, and overlapping requirements for reporting and data management — creating costs for industry. Estimated costs for industry of managing data without common standards runs into the billions of dollars. Because of these problems, industry groups have called on regulators to broadly adopt the LEI.

Equally important, the LEI system can also help industry, regulators, and policymakers trace exposures and connections across the financial system. If the system had been in place during the financial crisis of 2007-09, the breadth and depth of the exposures to the failing Lehman Brothers would have been far easier to assess and potentially manage.

Despite these advantages, decades-long efforts to mobilize broad support for creating a worldwide, single identification system for financial data met dead ends. Then, the financial crisis generated the spark to break through those barriers and solve the “collective action” problem impeding success.

An OFR brief released today, “Collective Action: Toward Solving a Vexing Problem to Build a Global Infrastructure for Financial Information,” tells the inside story of how the global LEI system became a reality.

The authors are OFR Chief Counsel Matthew Reed, former chairman of the LEI’s Regulatory Oversight Committee, and the two former vice chairmen, Bertrand Couillault of Banque de France and Jun Mizuguchi of the Financial Services Agency of Japan.

The brief describes the public-private partnership that keyed success, the importance of high-level backing from the G-20, the mix of legal tools that helped align the interests of industry and government, lessons for similar undertakings in the future, and critical next steps to realize the full benefits on the LEI and build on them.

During early development of the LEI system, U.S. financial regulators articulated requirements for an LEI system, including four that were core. The LEI would need to be: (1) persistent (the code would never change despite changes in company structure), (2) unique (only one code could be used for one company, everywhere in the world), (3) ubiquitous (used everywhere in the world), and (4) freely available.

To date, the LEI system has issued about a half-million LEIs across the world, but that’s not enough progress toward the ubiquity needed to yield the full array of benefits. To accelerate adoption, regulators must require broader use of the LEI in regulatory reporting. Authorities in Europe have required it, but our fellow U.S. regulators have been slower to respond. They need to step up and do more.

The OFR worked with other parts of the Treasury Department in adopting the LEI for qualified financial contract recordkeeping (for purposes of resolving failing financial institutions). We also expect to propose requiring use of the LEI for an upcoming collection of data describing markets for bilateral repurchase agreements, or repo. The OFR has authority to require data standards for data collected on behalf of the Financial Stability Oversight Council.

As the LEI system grows, incentives will likewise grow for industry to make the investment necessary to incorporate the LEI and map the LEI system to their own internal data identification systems.

LEI system benefits will also gain momentum as related data standards are built on the LEI foundation.

The LEI currently helps us answer the first of three basic questions about the financial system: Who is who?; Who owns whom?; and Who owns what? To answer the question of Who owns whom?, the LEI system is rolling out the ability to reveal hierarchies — the ownership structures of companies — another essential requirement for insight into how firms are exposed to one another.

To define Who owns what?, we are working to meet our statutory mandate to develop a financial instrument reference database, an authoritative source of data describing financial instruments.

The brief today chronicles a milestone for data standards, but does not mark a resting place. A great deal more work lies ahead. That work is a core component of the OFR mandate to improve the quality, scope, and accessibility of financial data to promote financial stability.

Richard Berner is the Director of the Office of Financial Research