LONDON (Reuters) - A global system to tag trades in stocks, bonds and derivatives that would help authorities spot risks and market abuse must be in place by March 2013, regulators said on Friday.
The Financial Stability Board (FSB), a regulatory task force working for the G20, spelt out how a global Legal Entity Identifier or LEI system would work.
One of the G20’s major reforms in the wake of the financial crisis, it will require each firm that trades on financial markets to have a unique identifier so that regulators can quickly check a bank’s or dealer’s overall exposure across asset classes.
In 2008 markets and regulators were alarmed by how much time they needed to find out who was exposed to derivatives transactions on the books of U.S. bank Lehman Brothers when it went bust.
The FSB says the LEI system will help regulators share information across borders and spot market abuses more easily and help banks assess risks on their books better.
“This system would be the ‘building block’ for many financial stability and regulatory objectives, and it would deliver substantial benefits for financial firms,” FSB Chairman and Bank of Canada Governor Mark Carney said in a statement.
The G20 leaders meet later this month in Mexico, where they are set to give political backing to the FSB plans they requested last year.
The FSB outlined how every trade should be tagged so that regulators know the name, address and basic ownership details.
Full rollout to all trades will take years, starting with the $700 trillion over-the-counter or off-exchange derivatives market and then widening to stocks, bonds and other instruments.
The actual tag will be a 20-digit code set by the International Organisation for Standardisation or ISO, and the process for setting it was published earlier this year.
The FSB said the tagging system will be headed by a regulatory oversight committee whose members are drawn from public authorities to keep an eye on how the private sector operates the system.
“The recommended implementation plan targets launch of the global LEI system on a self-standing basis by March 2013,” the FSB said.
The idea is for a federation of local systems based on the ISO standard that operate according to the FSB’s governance rules.
Banks would apply locally for an LEI code for a “modest fee”. The whole system would be run on a not-for profit basis.
The United States is set to become one of the early adopters by launching a mandatory system for derivatives trades, operated by the Depository Trust & Clearing Corporation (DTCC), by July, which will probably plug into the global network.
New European Union derivatives rules are also expected to back an identification system from early 2013.
It will be up to local regulators to determined whether an LEI is mandatory or voluntary for counterparties, but the G20 countries will be under pressure to back the new system.
Unlike other regulatory reforms, which can mean additional compliance costs, banks and brokers have welcomed an LEI system, partly because it will help automate “back office” processing of transactions and end a complex patchwork of differing tags.
Reporting by Huw Jones, editing by Jane Baird