LEIs are like a party for counterparties, albeit a festivity in which the guests are to arrive at different geographies and different times. The Legal Entity Identifiers (LEIs) are more than digital fingerprints that firms can use to identify counterparties; they represent a time- and money-saving infrastructure whose hour is at hand — or will be in a few months.
Setting the Timetable
“The ability to access data not only on counterparties but also on counterparties’ counterparties will be invaluable for banks and their trading clients in settling risk limits and monitoring them,” Keith Mullin of capital markets weekly International Financing Review wrote in TabbFORUM this week. Mullin makes his case for mandatory LEIs, suggesting regulators offer a transition timetable to those who would need to adapt their systems.
Such a timetable could help keep the first firm to institute LEIs from being the lone guest at the party.
“The beauty of market regulations is that they provide a deadline for compliance; budgeting for compliance is a must as otherwise the regulator can fine your firm or close it down; and a decision has to be made as compliance generally can’t be avoided or postponed,” financial technology veteran Chris Pickles wrote in Financial Technologies Forum.
In short, the regulatory push we’re seeing today brings the LEI vision closer to reality than ever. (Extra points to Pickles for using the rare phrase “the beauty of market regulations.”)
Crossing the Deadline
U.S. firms must have LEI programs in place by deadlines as early as this summer. The Commodity Futures Trading Commission (CFTC)rule 77 FR 2136 will require that LEIs identify swap counterparties in both recordkeeping and swap data reporting — and it takes effect in July.
“We’ll need to get LEIs for ourselves as well as the counterparties we’re dealing with,” said Robin Doyle, senior vice president at JPMorgan Chase and a member of an industry advisory panel on LEIs that will report its guidance to the G20 in June. “That will be thousands and thousands and thousands of counterparties globally that will need LEIs.”
“It’s going to be very real in very short order for firms around the globe,” Doyle added, speaking at Inside Reference Data’s “Counterparty Risk” webcast earlier this month. Draft LEI rules are also under development in other geographies, such as Canada, Australia, Singapore and Hong Kong, as well as Europe.
But that doesn’t mean that the people of the world are about to join hands, drink Coca-Cola and sing in perfect harmony.
Resistance is Brutal
“There will be some resistance to the policy,” Sybase Senior Director of Marketing Neil McGovern said during the same Inside Reference Data webcast. “I believe that in China, they’re less than enamored with the U.S. creating this system.”
“But I think that inevitably around the world this system — or a similar type of system — will have to be in place,” McGovern said. “The benefits are too great.”
And the drawbacks are too few.
Many detractors of implementing LEIs in the U.S. point out that American firms would not be able to trade with non-participating counterparties. But those counterparties will miss that business, and implement LEIs to keep those dollars flowing.
Some will be slow on the uptake. That just means the party will be well underway when the stragglers arrive — and those firms will still have to make the transition to what will be a well-established system.
No Optionality on LEIs. Make Them Mandatory by Keith Mullin
Report from the LEI Front Lines by Chris Pickles
Counterparty Risk Webcast from Inside Reference Data