Data quality is the root of all evil, or the fountain of all good. Each of us in the Financial Services industry have all spent hours juggling and sifting data in one form or another. We would all have our own tales to tell of how hard this can be.
Many of us would have specific tales to tell of how hard reporting on clients and counterparts is. Sort out your Large Exposure reporting; you need clean legal and credit hierarchies. FATCA reporting; you need full, reliable data on the client. The world’s largest banks, the G-SIBs, have to file weekly reports on exposures. Etc., etc., etc.
Sorting and maintaining data is a lot easier if you have a single identifier. Our IT friends call this a “unique key”. Cars have number plates, books have ISBN numbers, we have social security numbers or driving licence numbers. The LEI, the Legal Entity Identifier, is supposed to play that same role for companies.
Regulators require the use of the LEI in certain forms of reporting. This makes “some sense; if you are trying to compare the data Goldman Sachs is reporting to what you are seeing from Citibank, trying to match on a name or text field is really hard work.
Internally in banks, the ability to aggregate client & counterparty data is a whole lot easier if you can do this using the unique keys than by matching names. Imagine you have 100’000 rows of data about exposure; counterparts and each one’s parent company, but only “company names”. The Chief Risk Officer is worried about bad news form Credit Suisse and asks you what your aggregate exposure is to the parent company Credit Suisse Group AG. With no unique key, you need to add exposures to many entities. Click here for a simplified organisation chart. This is hard. It is a lot easier if each entity has a single unique key identifying Credit Suisse Group AG as the ultimate parent.
An announcement last week on the development of LEIs set my alarm bells ringing. The LEI registrations are declining; there are more lapsing than there are new ones. Two factors drive getting things done in the FS world; rules & deadlines. Having a LEI is only required in the world of swaps dealing. Next year, MiFID II will require LEIs for all those who want to trade financial instruments.
My first thought was that we simply need to create a LEI and maintain it for every company. Maybe it would be in the interests of all the banks in a particular market to pay for this. Using Switzerland as a test, there are about 600’000 existing companies, with about 4% growth per year. At the current rates for LEI creation and maintenance, of some €200 and €120 per year, that would be some €120 million in one time fees and €72 million in annual fees. Too much to ask a few banks to pay.
Locally, every company has a national registration number. My own company, 3C Advisory LLC, has two unique code given from companies house, CHE-115.526.375. Like a phone number, that format will look different for any country, but there is a known format for any one country.
My company does not need a LEI, so I would not voluntarily pay for the service. In fact, keeping this national identifier each year costs the company nothing. If I was told I had to have a LEI and pay for it, I would say: “use the Swiss national identifier”. Next year, with MiFID II, I might
#1 LEI will not be ubiquitous
This makes it hard for the banks to manage the data; if a particular client or counterpart record does not have a LEI, then it is not clear if that is because there isn’t one or it was forgotten.
#2 Buying client & counterpart services may not be efficient effective
For financial instruments, there is a rich variety of services available: pricing, corporate actions, potential default information. All are underpinned by having a unique key; for example, an ISIN or a ticker. Without that consistent identifier, managing client & counterpart records is harder than it might be.
#3 Need to wonder if LEI is such a good idea
Knowing a bit about data, I am thinking that a unique ID could be formed out of two tags:
<Country of incorporation>CH </Country of incorporation>
<Local Identifier> CHE-115.526.375 </Local Identifier>
Separately you would have a metadata table showing the standard format for each local identifier.
In a way this strikes me as the same problem as forms on websites being one size fits all. I recently had to do a US tax filing for my son. I used some free software, which was naturally American. Even when I noted the country of residence as Switzerland, for the phone number the machine insisted on the format (212) 946 1000. America not able to deal with things East of Brooklyn or West of LA; no surprise, still annoying.
I was not party to the debate when LEIs were created. Maybe there are several good reasons it is needed. I can though see the pain being caused right now by the fact that they are not ubiquitous and they exist in parallel to other numbers.
Please help me understand and share your views.
About the Author
I help banks master their post trade processing; optimising, re-engineering, building.
I understand the front-to-back and end-to-end impact of what banks do. That allows me to build the best processes for my clients; ones that deliver on the three key dimensions of Operations: control, capacity and cost.
Are available on the 3C Advisory website, click here.
The Bankers’ Plumber’s Handbook
How to do Operations in an Investment Bank, or not! Includes many of the Blog Posts, with the benefit of context and detailed explanations of the issues. True stories about where things go wrong in the world of banking. Available in hard copy only.
Cash & Liquidity Management
An up to date view of the latest issues and how BCBS guidance that comes into force from Jan 1 2015 will affect this area of banking. Kindle and hard copy.
Hard Copy via Create Space: Click here
Amazon UK: Click here
Amazon US: Click Here