Milestone Reached for the Global Initiative to Establish a Legal Entity Identifier (LEI)

The Financial Stability Board (FSB), which brings together global financial regulators and policymakers, reached a critical milestone this week in the initiative to establish a worldwide standard for uniquely identifying parties to financial transactions. This linchpin for financial data, known as the Legal Entity Identifier (LEI), will allow financial companies and financial regulators to better understand true exposures and counterparty risks across the global financial system.

During the financial crisis neither institutions nor regulators were able to accurately assess direct or indirect global exposures to troubled companies, hampering efforts to manage, and to respond to, risks. A major reason was the absence of a consistent way of identifying counterparties in the numerous and disparate databases that financial firms and regulators maintain for tracking global financial instruments and positions. By filling this critical gap, the LEI will be a valuable tool for identifying risks associated with these exposures and helping to prevent such critical failures in the future.

Treasury’s Office of Financial Research (OFR) helped to lead the FSB process and collaborated with the OFR’s global counterparts to provide recommendations for establishing a global LEI system and for proposing a governance framework to protect the public interest in the LEI. The FSB endorsed those recommendations on Wednesday (May 30). The recommendations recognize a 20-digit identifier for parties to financial transactions that are in line with the ISO 17442:2012 standard, also published Wednesday. This recognition allows market participants to begin preparations for the eventual implementation of the global LEI identifier next year. The identifier will contain references to a core set of reference data, such as the legal entity’s name and the address of its headquarters.

The recommendations came from the FSB’s LEI Expert Group, made up of public officials from the United States, other countries, and international organizations, and supported by an industry advisory panel. The OFR served as a member of the Expert Group and as a chair for two of its five work streams.

The FSB Plenary will deliver these proposals for endorsement at the G20 Summit next month in Los Cabos, Mexico. That endorsement will pave the way for LEI implementation, scheduled to be completed in March, 2013.

Dessa Glasser is Acting Deputy Director and Chief Business Officer for the Data Center of the OFR.