Capco Blog

The LEItmotif the OTC bUSIness is preoccUPIed with: data integrity and consistency

OTC Clearing Part 6

Just one year ago you were probably aware of ISINs, BICs and/or SWIFT codes. But LEI, USI or UPI would probably have elicited a mere shrug. In the regulated world of OTC derivatives, these acronyms are the foundation for stringent and consistent regulatory oversight.

The Dodd-Frank Act mandated the creation of the Office of Financial Research (OFR) with the task to collect data from financial market participants to allow for enhanced visibility and transparency of a highly interconnected global market. The concept of a legal entity identifier (LEI) was adopted to facilitate this task by consistently identifying parties to financial transactions.

Some parties may be frustrated with another identifier having to go into the system, but let’s take a look at the design and proposed governance to better understand the benefits. Based on the ISO standard 17442, the LEI is a ‘non-speaking’ 20-digit alphanumeric identifier governed by a three-tiered structure of Regulatory Oversight Committee, Global Operating Unit and Local Operating Unit. It is a commonly accepted standard for the unique identification of financial counterparties. Tim Lind, head of legal entity and corporate actions at Thomson Reuters said that he’s “never had a conversation with customers – with anyone in the market – who said this was a dumb idea”.

There have been past initiatives which tried to achieve this, like the IBEI. But never before was such an identifier backed by the regulatory demand, which will propel the LEI to the forefront of counterparty management in financial institutions. Although for now regulators only demand the LEI for reporting purposes the number of usage possibilities are varied.

First, the LEI will provide complete and consolidated information about the entire firm’s positions, rather than the narrowly focused silos of mismatched data. A seamless integration between trading, risk, settlement and accounting systems will become reality.

Secondly, having a firm-wide view on what business is being done with an institution will help in understanding that counterparty’s risk profile and will also be the base for cross-selling activities that will ultimately enhance the revenue and profit generated with a customer.

Lastly, together with the implementation of other regulatory-backed identifiers, like the unique swap ID (USI) or the unique product ID (UPI), internal and external reporting will become streamlined, timely more accurate and cost-efficient.

Financial institutions must grab this opportunity to upgrade data management infrastructures to not only incorporate LEI, USI, UPI and others into the existing framework but rather use them to lay the foundation for the future data landscape of the organisation. Although there is a cost involved in upgrading data management infrastructure, the price of not doing so – and the associated risks – is overwhelming.

Next week’s post in the OTC clearing blog series looks at new emerging trading venues.

Comments

Intelligence and simplicity - easy to unedrstand how you think.

Thanks, to both of you, for the nice words about my blog. I published my ovleral summary of the Villanova experience last Friday. There was less IT content than I expected: it was all soft skill-based, so if your MS didn't cover these aspects comprehensively then the course could still add some value to you, Dave.

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