Office of Financial Research Issues Statement on Progress to Date and Next Steps Forward in the Global Initiative to Establish a Legal Entity Identifier (LEI)
Published: August 12, 2011
WASHINGTON – Today, the U.S. Department of Treasury’s Office of Financial Research (OFR) issued the following statement on the progress made to date and next steps forward in the global initiative to establish a Legal Entity Identifier (LEI).
In November 2010, the OFR stated that if a universal LEI was established by July 15, 2011, it planned to issue a notice of proposed rulemaking that would require the LEI to be used for data reported to the OFR. Although significant progress has been made to date in developing an LEI—including discussions of principles by global regulators; recommendations by a global coalition of financial services firms and trade associations; a technical specification for the identifier by an international standards body; and proposals by parties to manage the LEI—additional work needs to be done to build international consensus on key issues before the OFR issues a rule.
“The OFR will continue to work with policymakers, regulators, and the private sector to achieve a mutually agreeable, effective, and timely global LEI solution,” said Richard Berner, Counselor to the Secretary of the Treasury. “An LEI would serve as a cornerstone in fulfilling the G-20 mandate to improve market integrity and regulators’ ability to mitigate risks posed to the financial system.”
The Financial Stability Board (FSB) is hosting a workshop on September 28 and 29 to discuss how to coordinate work on LEI and move the initiative forward. Additionally, because of the work that has been done to date, the OFR believes that sufficient progress can be made to allow for an initial phase of implementation in 2012, consistent with the needs of regulatory authorities in a variety of jurisdictions. The OFR intends to issue a notice of proposed rulemaking consistent with that timeline. In the United States, the OFR’s objective remains to coordinate with the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC), which are issuing rules for reporting swap transactions to trade repositories, and for all three agencies to require the same system for identifying parties in reporting.
An LEI is a unique number that would identify a legally distinct entity that engages in financial market activities. Currently, there are many ways to identify entities, but there is no universal identification scheme for legal entities across markets and jurisdictions.
During the recent crisis, the lack of a universal entity identifier made it difficult for firms and regulators to assess market exposures to risky or failing institutions. An LEI would promote financial stability by illuminating those exposures. It would also contribute to market efficiency by enhancing transparency for investors, reducing reporting burdens and other operational costs for financial firms, and improving customer service.
Financial companies and information technology professionals worldwide have been attempting to develop a standard identification system for financial market participants over the past decade. But the perceived benefits of doing so were primarily in processing and insufficient to generate consensus. The financial crisis demonstrated to industry and regulators the value of the LEI in risk management and provided momentum toward establishing it. Indeed, the Dodd-Frank Wall Street Reform and Consumer Protection Act created a critical sponsor in the LEI’s development: the OFR.
In November 2010, the OFR issued a policy statement to promote development of an LEI. The OFR’s objectives were to facilitate the establishment of a global identifier through international consensus – developed jointly by the public sector and private industry – that is suitable for a range of regulatory and business needs. As a first step in that process, the statement defined the OFR’s technical requirements for the identifier; associated data that describe the legal entity; and a system for issuing, validating, and maintaining that information.
Today, the OFR remains strongly committed to the objectives expressed in its policy statement, and we are encouraged by the progress that the public and private sectors have made toward establishing a global LEI over the past eight months.
The OFR has conducted extensive outreach to solicit participation and input from a broad group of policymakers and regulators, and to facilitate global coordination on important issues, such as scope, governance, and implementation. A task force of the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) has been evaluating the potential use of an LEI for over-the-counter (OTC) derivative reporting worldwide. In the United States, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) proposed rules for swap reporting and expressed a preference for using an LEI for that reporting, if it can be established through international consensus and is available in a timely manner. The Canadian Securities Administrators published a consultation paper calling for each participant conducting a derivative transaction in Canada to be assigned an LEI based on universal internationally accepted standards. And recently the Hong Kong Monetary Authority (HKMA) published a consultation paper on reporting to the Hong Kong Trade Repository (HKTR), which states that the HKTR will work with the HKMA to consider how to incorporate a global LEI into that reporting.
Private sector participation and expertise in this process is essential, and private industry has made significant strides in helping to develop an LEI. A global coalition of financial services firms and trade associations developed common requirements for an LEI to attempt to maximize its utility to both the private and public sectors, and the coalition recently published a recommendation for how an LEI could be implemented. The International Organization for Standardization (ISO) has developed a draft technical specification for the identifier (ISO 17442), which the global coalition of financial services firms and trade associations recommended be part of the solution. The OFR will continue to consult with these organizations and other members of the private sector to make sure that all stakeholders have adequate opportunity to inform future decisions.
The OFR is working with the FSB Secretariat and other authorities to organize the September LEI workshop, which will include stakeholders and experts in finance, data, and technology from the public and private sectors. One objective for the workshop is for public sector participants to develop a roadmap for their next steps in the development and implementation of an LEI.
The OFR will publish updates on progress in establishing a global LEI standard on its website, accessible through financialresearch.gov
For a copy of the timeline of major events in the global effort to establish an LEI, please click here.