London Stock Exchange Group: Setting the standard - Emma Kalliomaki
As products such as over-the-counter equity derivatives grow in popularity, it is up to administrative bodies to ensure regulations and technologies keep pace with market changes. London Stock Exchange Group's Emma Kalliomaki, head of SEDOL Masterfile, looks at the newly introduced Global Legal Entity System and its role in helping firms comply.
Across Europe, financial institutions face increasing and demanding regulation, and must actively seek to mitigate risk. Over-the-counter equity derivative (OTCED) growth has been steadily increasing and is now a truly global phenomenon. This rapid growth, however, is constrained by the ability of "operations" to keep pace with trading innovations. Solving some of the complexities in documentation, as well as developing and adopting standards, is key to moving this market to a more automated environment.
What is the role of London Stock Exchange Group in providing services around regulation?
Emma Kalliomaki: London Stock Exchange Group (LSEG)is a key partner and provides a number of services to assist firms with upcoming and future regulations.
As one of Europe's leading diversified exchange groups, LSEG provides a number of services to assist firms with meeting their regulatory requirements. UnaVista, LSEG's hosted matching and reconciliation platform, allows firms to address multiple regulations through one interface, so the client can now report for EMIR, MiFID, REMIT and more in one place. LSEG has unique access to a wide variety of reference data, such as SEDOL and legal entity identifiers (LEIs) that can help firms meet these requirements by enriching their own data sources.
What are the implications of the legal entity identifier (LEI) and LSEG's role within it?
The Global LEI System (GLEIS), endorsed by the G20 in 2012, is designed to create a global-reference-data system that clearly identifies every legal personality or structure, excluding individuals that are party to a financial transaction. To achieve this, it aims to have assigned unique LEIs to all such entities worldwide. This will create a much needed global identification system for firms involved in financial transactions, thus creating a more efficient global system and reducing systematic risk.
London Stock Exchange has been endorsed by the governing body of this system, the Regulatory Oversight Committee (ROC), to be a pre-local operating unit (pre-LOU) for allocation of LEIs globally. London Stock Exchange has now allocated over 23,000 pre-LEIs (as of 3 June 2014) across 105 countries.
Can you describe the differences between a pre-LEI and an LEI?
The ROC were keen to keep momentum going with the set up of the GLEIS, and wanted to begin issuing LEIs as early as possible rather than wait for the GLEIS to be fully operational. Therefore, an interim system was created where pre-LOUs would be authorised to issue pre-LEIs. The pre-LEIs share all the same characteristics as the official LEIs, so when the GLEIS is fully operational, these pre-LEIs will seamlessly transition to be known as LEIs.
What are the main challenges being faced to get this system up and running?
There have been many previous attempts to develop a global entity identifier standard in the past. These attempts have not been successful due to implementation costs and regional differences in how it should operate. The success of adoption of the current LEI initiative has been due to the collaboration of the regulators and private sector for development of the standard. Additionally, global regulations have made it mandatory for firms to acquire and use LEIs in order to comply with trade repository reporting regulations. Both Dodd-Frank in the US and EMIR in the EU, require both parties in a financial transaction to be identified by a pre-LEI in order to meet reporting obligations. This has helped early adoption of the system and global acceptance.
Despite widespread promotion of the GLEIS, there are still a large number of entities that do not know they need an LEI. Estimates of the total number of global LEIs that should be allocated are in the region of one million; however, so far, only approximately 275,000 have been assigned. This may be attributed to the wide-reaching nature of the system, and the fact that regulation currently focuses on reporting of derivatives transactions. Therefore, much of the financial industry has been allocated a pre-LEI; however, the corporate world is less up to speed. Companies that perform one derivative trade a year will need to acquire a pre-LEI for themselves, and will find it hard to operate without one.
London Stock Exchange has tried to make the process as simple as possible for any firm that needs to acquire a pre-LEI. Individuals can self-register with UnaVista to see a consolidated list of all global pre-LEIs; they are then able to perform a simple search to see if their entity has a pre-LEI yet; if not, they can request one immediately by filling in the relevant details. We are committed to maintaining the systems accuracy and, in line with the principles of the GLEIS, every pre-LEI request is manually validated by our team before being assigned.
How will the system benefit firms who embrace the new identifiers?
As discussed, many regulations are already mandating the use of LEIs. Future regulations such as AIFMD, MiFIR and REMIT will also require firms to obtain an LEI in order to meet reporting obligations. Within Europe, ESMA is also aligning future revisions of regulations, such as MiFID II and MAD II to include LEIs. This will extend the reporting scope to include all parties to be identified using an LEI, including issuers,
Firms that acquire a pre-LEI now can be assured they will be ready for future regulations. LEIs remain with the entity for their lifespan. Additionally, many of the larger financial brokers have already implemented LEI as a mandatory requirement and have notified customers they require a pre-LEI in order to continue transacting on their behalf.
More than this, firms have recognised that embracing the GLEIS provides the opportunity to operate more efficiently and improve their own reference data systems.
How does the system affect the corporate world?
Regardless of the industry of an entity, any company that engages in a derivatives transaction, including a single transaction or inter-group company transactions, is required to report and be identified using a pre-LEI. Corporates are not exempt from the regulation and must assess their obligations.
What future developments are there on the horizon?
As with implementation of any new standard, there is a need to establish a common and consistent method of representing the data. Although the international standard that LEI is based on - ISO 17442 - provides a minimum data requirement, it does not outline the format of the data fields being collected. This means that the raw data from the different pre-LOUs is not easily aligned. Additionally, as the GLEIS is not formally established, there is currently no central operating unit (COU) for collation and distribution of the universe of pre-LEI data.
During this interim period, the ROC, pre-LOUs and members of the private sector have been working together to feed into the development of a common data file format. The proposed common data file is currently awaiting approval from the ROC and, upon confirmation, will be adopted by all pre-LOUs.
London Stock Exchange is assisting its clients by providing a consolidated lookup and downloadable data file of all pre-LEIS assigned by operational and endorsed pre-LOUs. This consolidated data is available after a brief registration to the LEI interface via the UnaVista platform.