Guest Blogger: Tom Brown, co-executive sponsor of the Regulatory Working Group at ISITC and Associate Partner at Brook Path Partners, Inc.
The mission of ISITC is to develop standards and market practices designed to enhance efficiency across the transaction lifecycle by leveraging the expertise of our members. Recently, I participated in an International Organization for Standardization (ISO) study group to establish identifiers for financial entities. The result: ISO 17442 was recommended to the global service industry for use as the global Legal Entity Identifier (LEI) standard.
This past week, ISO made significant progress with the development of a globally consistent LEI by publishing ISO 17442. This was a logical step to define a universal reference system by which all entities engaged in financial transactions can be accurately and systematically categorized. The Financial Stability Board (FSB), the global regulatory authority responsible for coordinating these efforts, approved the standard and will recommend a deadline of March 2013 for the launch of the global LEI system to the G-20 (Group of 20).
Implementing a global LEI standard is an ambitious task and one which requires vast amounts of international cooperation from the industry. While isolated requests for an internationally consistent way of identifying entities have been around for years, it was not until the global financial crisis that an increased emphasis on transparency prompted regulatory authorities to prioritize information and data management as a way to reduce systemic risk.
Currently, financial institutions have their own separate ways of identifying organizations who engage in financial transactions with them. Data management standards have slowly been adjusted to an increasingly globalized financial services industry, however, no single standard had been set by which institutions could be identified. This practice has caused cross-referencing between institutions, and even between different departments within the same institution, to be complex and error-prone. The systemic risk this poses became apparent during the collapse of Lehman Brothers, when confusion arose in financial institutions over the level of exposure to the firm due to ambiguous identification data and lack of a standardized format for listing corporate hierarchies.
ISO 17442 is the first tangible step towards creating an international identification standard for entities engaging in financial transactions. This increased transparency and clarity in data management will streamline information sharing between financial organizations, creating needed efficiencies. Additionally, firms will be able to facilitate anti-fraud practices as regulators will now be able to clearly identify corporate structures of international companies.
ISITC provides members with the means to influence the securities transaction lifecycle through collaboration with other industry participants to establish best practices. Ongoing coordination between ISO, DTCC, SWIFT, ANNA (the Association of National Numbering Agencies), the FSB and support from ISITC are required to implement a global LEI standard. This initiative would produce huge efficiency gains for financial services firms and reduce risk exposures in the event of counterparty defaults. As a result, it is encouraging to see the proactivity of both the ISO and the FSB in taking decisive action to define the format of the LEI standard and push forward with this initiative.