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The Global Legal Entity Identifier: Will it Deliver?

The Global Legal Entity Identifier: Will it Deliver?. Alistair Milne Professor of Financial Economics School of Business and Economics/ Co-director Centre for Post Crisis Finance. Our research. Alfred P. Sloan Foundation Grant Stage 1: Interviews with data management professionals

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The Global Legal Entity Identifier: Will it Deliver?

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  1. The Global Legal Entity Identifier: Will it Deliver? Alistair Milne Professor of Financial Economics School of Business and Economics/ Co-director Centre for Post Crisis Finance

  2. Our research • Alfred P. Sloan Foundation Grant • Stage 1: Interviews with data management professionals • Leading firms • Independents • Goal: investigate costs and benefits of the LEI • Subsequent work on use in counterparty risk management and in resolution of failed firms

  3. The creation of the LEI • US • Dodd-Frank • Financial Stability Oversight Council • Office of Financial Research • Globally • G20/Financial Stability Board • Coalition of global regulators • Private Sector Preparatory Group • Initial application (Dodd-Frank/EMIR) • Reporting OTC derivative trades to trade repositories

  4. Global governance

  5. Interviews • five senior data managers in the major global investment banks and seven industry experts working for advisory firms or consultancies (most of whom are active in the LEI PSPG). • Interviews lasted between 30 minutes and 70 minutes and were organised around three “initial questions”:

  6. Three thematic questions • What are the major cost, efficiency and risk-reductions achievable from using LEI? • How important is it to have good hierarchy reference data as part of the LEI in order to achieve these benefits? • Should this ownership hierarchy be provided by the LEI system? • Can LEI help with compliance costs of current regulations on OTC markets (Dodd Frank in the US, European Market Infrastructure Regulation EMIR in Europe)?

  7. Interviewees on benefits (1) • Improved client data management • Client on-boarding. • Updating of client information. • Observation of anti-money laundering (AML ) regulations. • Better client relationship management. • Straight through processing • Reducing failures in post-trade order matching, clearing and settlement.

  8. Interviewees on benefits (2) • Tax, management and regulatory reporting • Compliance with tax reporting requirements (FATCA) • Regulatory reporting requirements. • large exposure limits, eg. takeovers or divestments • Buyside services • Allocation of block or automated trades / also for security underwriting • ethical and other investment mandates. • Maintaining separation of client accounts. • ? corporate actions.

  9. Interviewees on risk management • Relatively short list • Frequent mention of monitoring of positions in failure situation e.g. Lehman Brothers • longstanding efforts to build internal systems of legal entity identifiers within their firms, • 2002 A-Team/ Reuter’s study that found that 65% of firms had their own central reference data system. • These systems already give them a broad understanding of their counterparty exposures • stretched when it comes to dealing with the practicalities of actual default. • Little reported relevance to e.g. CVA

  10. Interviewees on heirarchies • Confirmed complexity of challenge • No unique solution • Wide range of different views • LEI stick to core task unique numbering • hierarchy information should be left to third party vendors • LEI can provide easily verified hierarchy information, To overcome gaps/inaccuracies in vendor information • Eg • percentage of share ownership held by other LEI entity • name and registered address of shareholders.

  11. Private v. Social benefits • Private benefits • Removal of duplication • Customer on boarding • Know your customer • Anti Money Laundering • Lower costs of regulatory reporting • Social benefits • Transparency • Risk aggregation • Monitoring systemic risk

  12. Quantifying benefits to industry • To an ‘order of magnitude’ : $10bn per annum of measureable direct operational cost savings in wholesale financial markets. • Further indirect private benefits can eventually be expected • Within wholesale markets • In other banking applications • There is also a bigger picture. Only one specific aspect of referencing, information management and messaging standards in financial services.

  13. Rationale (only partly based on interviews) • Expenditure on external data. Inside Market Data (2006) total industry spend $13.6bn in 2004 • Internal data management costs. • KYC and AML also trade execution and processing. • Headcount in larger firms devoted to these activities is in excess of 1,000 employees, • >$100mn per firm; > 10bn across the industry. • Grody, Harmantzis, and Kaple2007 pg27: $12bn per year. • Operational automation • Grody, Harmantzis, and Kaple 2007) around $3bn in the largest 15 US firms

  14. Regulatory compliance • Agreement in principle that will help • Doubts about practice • Lack of clarity about use beyond Dodd-Frank/EMIR

  15. Conclusions • Private benefits of LEI • “back of the envelope” $10bn • Much of this in KYC • Not being stressed by ROC • Social benefits • Tranparency for regulators • Part of a bigger picture of technoogicaltransformatio of the industry

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