Jan 22 - The introduction of global legal entity identifiers (LEIs) in March 2013, designed to accurately identify which legal entities are involved in financial transactions, is a critically important step but the rate of adoption by global regulators will determine the timeframe in which the benefits are fully realised, says Fitch Solutions.
LEIs will provide many benefits, such as improved data aggregation and analysis, making it easier to combine and verify data within individual firms to support micro- and macro-prudential risk assessment. They will also facilitate enhanced regulatory supervision through improved information-sharing about legal entities between regulators and across borders. This is key for cross-border firms, whose business lines are overseen by multiple regulators.
Banks can expect to benefit from reduced operational costs. According to a submission to the U.S. Securities and Exchange Commission in 2011, Reuters reported last March that big US banks spend USD250m-USD1.25bn annually on processing non-standard, faulty or duplicated data, and could save USD300m per annum through the introduction of LEIs.
However, we expect the transition to be slow and potentially difficult where benefits may not be felt for a considerable time. Ultimately, the full extent of these benefits will only be realised when the LEI has been shown to be functional and effective and regulators, with a combined critical mass of entities within their jurisdictions, mandate their use. Market participants will also need time to conduct the mapping exercises and system upgrades required.
As of January 10 the LEI Implementation Group charter had been endorsed by the G20, 45 authorities had assented to the charter and a further 15 authorities acting as observers meet the criteria for the formation of the Regulatory Oversight Committee (ROC). The ROC will take full responsibility for the global LEI system in late January.
The ability to quickly and efficiently map LEIs to a proprietary universe of entities will vary by institution. Quality of existing entity reference data will be critical. Matching to internal systems is likely to be based on official (legal) name, headquarter and formation address. This process is likely to represent a manually intensive and/or costly process and there are likely to be coverage gaps and inconsistencies across market participants for at least the short term.
Fitch Solutions continues to closely monitor developments and has completed a number of preparatory steps to integrate LEIs across our broad suite of research and data feed products.
Link to Fitch Solutions’ Report: Legal Entity Identifiers