Formula three LEIs still not fast enough!
At a recent webcast on the topic of reference data, with a panel of leading data experts including representatives from HSBC and Euroclear, which I had the privilege of moderating. The many problems of data in the Capital Markets, including reference data were put on the table and a range of potential solutions was discussed. However, it was LEIs (Legal Entity Identifiers) that were highlighted personally by the panel as having wide ranging benefits for both buy and sell-side firms, and ultimately investors .
The drive for efficient operations in the financial markets is an ongoing mission, often led by regulations. Yet when it comes to data, the regulations are often found wanting. Allowing the capital markets to meander slowly for decades towards resolutions for its inherent data problems. An example of the slow pace of change in the introduction of an industrial strength solution, can be seen in the case of LEIs (Legal Entity Identifiers).
Unfortunately, the Financial Stability Board (FSB) who instigated the global initiative for LEIs, made an erroneous decision. In that sovereign laws are required to change, to enable LEIs to have legal empowerment. After many years of this torturous country by country crawl, the capital markets have been unable to introduce LEIs on a wide enough scale to make them as beneficial as they should be. Nor has there been a efficient fast issuance and cancellation process for them. Having a legal status for an LEI is not a bad thing, but it is such a slow, slow, process. This is one reason why the take up and use of identifiers has not reached the heights it should have, by now.
There was little support from the panel for the LEI issuance structures and sovereign legal approach taken by the FSB. However, the Global Legal Entity Identifier Foundation (GLEIF) and SWIFT have agreed a link between LEIs and BIC codes. This will certainly be a welcome boost to increasing the velocity of LEI distribution and importantly usage.
An overly complicated creation and subsequent operational process, is a common factor in the resolution of most of the other problems found in the data supply chain. Commercial vendors are inextricably linked into the foundations of the capital markets. Their relationship going back to the very creation of modern capital markets. Yet today, with all the technology available plus the Internet, there is little reason why data should continue to be expensive or complex. 100% high quality, accurate, data should be a minimum expectation, unfortunately this is not the case.
Personally,the panel thought that the inner market bank to bank use of LEIs was far more efficient than with broader investing, domestic and international use. Seemingly, central market banks are proficient in the operational use of LEIs. However, tier two and three banks are less so. Why should this be the case? It’s clear that LEIs are currently in the slow lane. They will arrive eventually, but an increase in pace by marketing the many benefits LEIs carry for capital market firms and their clients might speed things up.
So in summary, LEIs are definitely a very worthwhile innovation, brimming with benefits and I believe the linking of SWIFT BIC codes and LEIs will broaden its use However, to increase the take up further, a number of initiatives could be undertaken, which could definitely inject some power into the uptake. For example:
- Modify the legal set up structure created by the FSB.
- Make the management and distribution of them simpler and cheaper.
- Intensify the marketing of LEI benefits to grow demand.
Unfortunately, for now the LEI is a formula three car in formula one race!
By Gary Wright, DIrector, ISITC Europe CIC