The introduction of a standardized Legal Entity Identifier (LEI) could deliver significant benefits beyond allowing regulators to more accurately monitor systemic risk. While we are at the beginning of a journey toward what could become a global standard, thoughts are already turning to the application of the LEI in a wider context.
When packaged with additional content and reference data, the LEI becomes a tool to aggregate different identifiers to support an investment firm’s business requirements. Data linking via the LEI could support financial institutions’ efforts to improve the flow of data, by adding clarity and timeliness as well as enhancing risk management processes.
Utilizing the LEI as a common data point to cross reference other codes and link to core reference data would bring a number of operational benefits, some of which are described here.
The first is a reduction in the time spent reconciling data across internal databases, providing more interoperability across systems that run off different identification schemas. This leads to improvement in clearing and settling securities through more accurate identification of counterparties, reducing the volume of trade breaks due to mismatches caused by incomplete or inaccurate counterparty data.
Second, in processing entity-level corporate actions information (mergers and acquisitions notifications specifically) the LEI could help eliminate the need for firms to support complicated cross-referencing of data from different vendors using proprietary security identification codes. Practical difficulties would be reduced by applying and managing entity level events delivered on a “per security” basis.
Supporting enterprise risk management
This enhanced level of interoperability can significantly reduce the amount of time needed to combine entity data across business silos using different systems, making the core risk data attributes available much earlier in the trade process. The ability to ‘roll up’ to a single name issuer or group of issuers that represent the securities held in an investment portfolio or a fund further strengthens the internal risk management process.
Improved data aggregation complements forward-looking risk metrics by providing a consistent view on an on-demand basis. Providing these linkages at the beginning of the process, with greater data transparency, is likely to make it easier for risk managers to ascertain whether taking a position will increase exposure, stay within a client mandate or meet an internal investment policy.
Aggregating data in this manner enables organizations to increase the accuracy of information available when they first take an interest in a trade. That information can then flow from the front office through to the middle and back office delivering a consistent approach across the entire trade lifecycle. This consistency follows each individual step of the process from indication of trade, through point of trade, and then continuing through clearing and settlement.
This ‘near-time’ data capability can provide a consistent view of risk exposures going forward. In the advent of a single name stress event, for example, the default of a major global bank, it becomes much easier to understand parent-subsidiary relationships and calculate the total exposure to that single organization across individual portfolios with greater speed and accuracy.
The data flow, operational and risk management benefits achieved through improved data aggregation will vary by firm depending on their operational model. However, it is apparent that the potential utility of the LEI extends beyond a code for regulatory reporting. Its benefits really come down to how it is harnessed as a building block.
The LEI has the potential to act as a catalyst for firms to achieve their ambitions to centralise risk data management. In order for this to be successful, it will require data vendors to take an active role in facilitating its usage across the data supply chain by providing cross-referencing capabilities and packaged information services with the LEI embedded within them.
This article is provided for information purposes only. Nothing herein should be construed as legal or other professional advice or be relied upon as such.