The Global Legal Entity Identifier: Will

it Deliver?Alistair Milne

Professor of Financial EconomicsSchool of Business and Economics/

Co-director Centre for Post Crisis Finance

Our research

• Alfred P. Sloan Foundation Grant• Stage 1: Interviews with data management

professionals• Leading firms• Independents

• Goal: investigate costs and benefits of the LEI• Subsequent work on use in counterparty risk

management and in resolution of failed firms

The creation of the LEI

• US• Dodd-Frank

• Financial Stability Oversight Council• Office of Financial Research

• Globally• G20/Financial Stability Board• Coalition of global regulators• Private Sector Preparatory Group

• Initial application (Dodd-Frank/EMIR)• Reporting OTC derivative trades to trade repositories

Global governance

Interviews

• five senior data managers in the major global investment banks and seven industry experts working for advisory firms or consultancies (most of whom are active in the LEI PSPG).

• Interviews lasted between 30 minutes and 70 minutes and were organised around three “initial questions”:

Three thematic questions• What are the major cost, efficiency and risk-

reductions achievable from using LEI? • How important is it to have good hierarchy

reference data as part of the LEI in order to achieve these benefits? • Should this ownership hierarchy be provided by the

LEI system?• Can LEI help with compliance costs of current

regulations on OTC markets (Dodd Frank in the US, European Market Infrastructure Regulation EMIR in Europe)?

Interviewees on benefits (1)

• Improved client data management• Client on-boarding. • Updating of client information. • Observation of anti-money laundering (AML )

regulations. • Better client relationship management.

• Straight through processing• Reducing failures in post-trade order matching,

clearing and settlement.

Interviewees on benefits (2)

• Tax, management and regulatory reporting• Compliance with tax reporting requirements (FATCA) • Regulatory reporting requirements.

• large exposure limits, eg. takeovers or divestments

• Buyside services• Allocation of block or automated trades / also for

security underwriting• ethical and other investment mandates. • Maintaining separation of client accounts.

• ? corporate actions.

Interviewees on risk management• Relatively short list

• Frequent mention of monitoring of positions in failure situation e.g. Lehman Brothers

• longstanding efforts to build internal systems of legal entity identifiers within their firms, • 2002 A-Team/ Reuter’s study that found that 65% of

firms had their own central reference data system.• These systems already give them a broad

understanding of their counterparty exposures • stretched when it comes to dealing with the

practicalities of actual default.• Little reported relevance to e.g. CVA

Interviewees on heirarchies

• Confirmed complexity of challenge• No unique solution

• Wide range of different views• LEI stick to core task unique numbering

• hierarchy information should be left to third party vendors

• LEI can provide easily verified hierarchy information, To overcome gaps/inaccuracies in vendor information

• Eg• percentage of share ownership held by other LEI entity• name and registered address of shareholders.

Private v. Social benefits

• Private benefits• Removal of duplication

• Customer on boarding• Know your customer• Anti Money Laundering

• Lower costs of regulatory reporting• Social benefits

• Transparency• Risk aggregation• Monitoring systemic risk

Quantifying benefits to industry

• To an ‘order of magnitude’ : $10bn per annum of measureable direct operational cost savings in wholesale financial markets.

• Further indirect private benefits can eventually be expected• Within wholesale markets• In other banking applications

• There is also a bigger picture. Only one specific aspect of referencing, information management and messaging standards in financial services.

Rationale (only partly based on interviews)

• Expenditure on external data. Inside Market Data (2006) total industry spend $13.6bn in 2004

• Internal data management costs. • KYC and AML also trade execution and processing. • Headcount in larger firms devoted to these activities

is in excess of 1,000 employees,• > $100mn per firm; > 10bn across the industry.

• Grody, Harmantzis, and Kaple 2007 pg27: $12bn per year.

• Operational automation • Grody, Harmantzis, and Kaple 2007) around $3bn in

the largest 15 US firms

Regulatory compliance

• Agreement in principle that will help• Doubts about practice

• Lack of clarity about use beyond Dodd-Frank/EMIR

Conclusions

• Private benefits of LEI• “back of the envelope” $10bn• Much of this in KYC• Not being stressed by ROC

• Social benefits• Tranparency for regulators• Part of a bigger picture of technoogical transformatio

of the industry