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Global Identification Standards For Market Participants

Global Identification Standards For Counterparty and Other Financial Market Participants

By Allan D. Grody*, Peter J. Hughes*, Daniel Reininger*, March 2012

This article originally appeared in the Spring 2012 issue of RiskJournal, the publication of the PRMIA’s Washington, DC chapter. 

Abstract:  Financial service industry regulators are focused on observing systemic risk across enormously complex interconnected global financial institutions. While these systemically important financial institutions continue to improve their enterprise risk management systems, regulators are now intent on imposing further regulations to analyze the risk exposures that arise across these firms. Many attempts are underway to understand how to aggregate risk within and across financial institutions and provide for transparency of financial transactions and risk exposures.  It is understood that without an ability to view the underlying positions and cash flows, valued in standard ways and aggregated by counterparty through common identifiers, neither risk triggers nor risk exposures can be observed nor can systemic threats be detected.

It has been accepted by regulators that the very first pillar of global financial reform is a standard for identifying the same financial market participant to each regulator in the same way.  Getting agreement on a globally unique and standardized legal entity identifier (the LEI) is the first step.

This paper reports on the past and current efforts by industry members and sovereign regulators, newly empowered  through  the  G20’s  Financial  Stability Board (FSB) to develop a global identification system for such purpose. This paper also reviews the origins of systemic risk in the financial industry and its related data issues and how standard identification of financial market participants and the products they trade connects to regulators’ and financial institutions’ ability to analyze systemic   risk.   It discusses proposals offered for a global identification system and approaches taken in other industries and economic sectors.

The paper proposes a government and industry partnership in which governance is shared and operating elements of the global identification system are compartmentalized for control, security and confidentiality purposes.  The paper previews a global standards convention along with its operational and technical implementation.  The standard proposed is a set of eleven (11) unique, unambiguous and universal characters constructed around a two part apportionment and assignment process between regulators and financial market participants.  It is shown that this two part construction is essential to accommodate requirements of sovereignty, control and confidentiality put forward in more recent regulatory requirements.

The paper concludes that the proposed global identification system satisfies all known elements of regulators’ requirements for  the  LEI.  It also lays the foundation for further rule making and issues yet to be addressed for contract and instrument identification, financial event identification and data aggregation of valued positions and cash flows for systemic risk analysis, the ultimate objective of the rule making.


Long overdue, a global common identification system for the financial industry as proposed by US regulators is now elevated to the status of global regulation as the G-20’s Financial Stability Board (FSB) has accepted a mandate to oversee further work. This regulatory push was first prompted by the US Treasury along with other US regulators, discussed amongst data management professionals and their trade groups and standards representatives, and now commented upon by the International Organization of Securities Commissions (IOSCO) and the Bank for International Settlements (BIS’s) Committee on Payment and Settlement Systems (CPSS).  The global dimension of its implementation was reinforced recently at the G-20’s Summit where the concept of globally unique identifiers for all financial market participants was formally incorporated into its mandate for overseeing financial reform.  The plan is to start with the common identification of legal entities (LEI’s) engaged as counterparties in financial transactions, move quickly to similarly identify the OTC derivative products they trade in, and then move to identify their associated hierarchies of ownership.  Thereafter, to evolve this identification system to all financial market participants and all financial instruments and contracts.

That we came this far without having such a global identification system is quite remarkable.  It was only by rummaging through the records of the collapsed Lehman Brothers did regulators come to recognize what the industry had known for nearly a quarter century.  Regulators had no automated means to aggregate and monitor global financial transactions across multiple financial market participants for observing the risks they were exposed to.

Regulators learned that multiple identifiers for the industry’s financial market participants and products were inhibiting the aggregation of information both within financial institutions and certainly across financial institutions.  Further, US regulators had the foresight to suggest that it may well benefit all governments to observe risk in their own financial sectors by accommodating such a common identification system globally.

The Legal Entity Identifier (LEI)

The LEI (and its equivalents, the Commodity Futures Trading Commission’s UCI – Unique Counterparty Identifier and the  Securities  and  Exchange  Commission’s  (SEC’s) UIC – Unique Identity Code) became subject of solicitations of interest  by  the  US  Treasury’s OFR, the CFTC and the SEC in late 2010.  Thirty-three responses were received and made public on each agency’s respective website.  A later solicitation, by the CPSS and IOSCO, ending in late September of this year, resulted in thirty-two responses, also made public on their website.9 A US-led industry trade group, the Securities Industry and Financial Markets Association (SIFMA) initiated its own solicitation of interest at the beginning of 2011.  A recommendation of solution providers followed10 and in July, 2011 the OFR, the agency that was the US lead on the LEI, moved to involve the FSB, with its global mandate, to implement the LEI globally.

Observers suggest that a global identification solution will require understanding the interconnected financial industry in the context of managing a supply chain that includes regulators, issuers, data vendors, auditors, and non-financial counterparty participants as key constituents in the solution; considering solutions established in other segments of the global economy beyond those conceptualized from precedents found in the financial industry; looking at the Internet’s overlay structures, particularly the World Wide Web, as a storage and distribution mechanism to be emulated in implementing a global LEI system and beyond; and looking to the global standardization of financial statement reporting as a parallel to the implementation process necessary for a global identification system.

In this last regard, it is important to recognize that corporate issuers and other financial market participants, especially listing exchanges for financial instruments and financial contracts, are usually the first to encounter new legal entities as well as new tradable products.  Situated as they are at the origins of a financial transaction’s life cycle, these constituent groups originate the reference data contained in new product filings, prospectuses, offering memoranda, articles of incorporation, trust agreements, master derivatives agreements, and public announcements of corporate events.  Today this information is largely defined in legal terms and is manually transformed into the data attributes necessary to make this information operational by computer.  This was the same in the past for financial statement reporting, until the vocabulary of generally accepted accounting principles and international financial reports of account were encapsulated into eXtensible Markup Language (XML) making it computer readable at the business application and communication layers.  The global success of this effort amongst regulators and filers suggests a parallel undertaking for global financial participant identification and its associated reference data.

Origins of Systemic Risk and the Data Issue

The Great Depression of this past century can arguably be considered the first occurrence of global systemic risk, a financial contagion of global proportions that, like a new virus, spreads rapidly with no known antidote.  However, that earlier systemic contagion occurred at a time when data was measured in pages not petabytes; bulk paperwork was transported via postal services networked together by steamship and private courier; orders, trades and ticker tapes moved at character-per-second speed; voice conversations on the telephone were subject to misinterpretations; and wireless cables had limited capacity.  Today the contagion in any form of financial transaction is transported instantaneously through light pulses at light speed over fiber, airways and via satellite.

The Computer and Communications Era Impacts

The modern day variant of systemic risk can be traced to the late sixties, a time of telecomputer-connected automation of Wall Street’s front and back-offices.  The volume of transactions resulting from a burgeoning middle class of investors collided with a paper based clerically intense work process.  This near collapse of the US’s capital markets drove panic throughout the fledgling foundations of a telecomputing-led globally interconnected financial supply chain.


The first computer-era financial product identification standard, the US-centric CUSIP numbering system for US stocks and bonds was developed in response to the paper crisis of that era.  Coincident with this event, international banks working with the new methods of telecomputing and the new reality of a post Bretton Woods floating currency exchange regime began planning the SWIFT system which would transmit payments in foreign currencies between banks.  SWIFT operates today in much the same way as then, with a set of proprietary codes known as BICs to identify the banks and their branches that use its network.  SWIFT, not yet a year old at the time, saw a new purpose in planning its services – mitigating risk as the Herstatt Bank in Germany was declared bankrupt overnight between US and German time zones.  Herstatt had received funds in US dollars but was unable to complete its payments to the US banks because its assets were frozen.

At about this same time long lines were forming at checkout counters in department stores and supermarkets.  Inventory management and price-labeling were manual and error prone.  Labor-intensive check-ins stymied delivery to outlets.  Error rates, pilferage and unaccounted inventory discrepancies began to soar.  The retail industry motivated itself and leveraged available technologies to create one of the fabled success stories of the information age, the creation of the Universal Product Code (UPC).  The UPC was first scanned and read by computer in a supermarket in 1974 to identify Wrigley’s chewing gum. The UPC, expanded to identify business entities, locations and products is now used throughout the world. It is found in the ubiquitous bar code, the RFID (Radio Frequency Identification) transmitter and now in the evolving Data Matrix Symbol.

A Brief History of Systemic Contagion

The October, 1987 market crash was not unlike today’s  financial crisis, a contagion of interconnected markets and interrelated cash flows arbitraged through mathematically driven strategies that crippled the exchange based US equity, futures and options markets. Cash flows between clearing houses, central counterparties, clearing firms and investors were locked up as computers froze and trading halts were applied in ad-hoc fashion.

Brought on by a misaligned financially engineered product used to hedge market risk through a technique known as portfolio insurance, the 1987 market crash awakened regulators to the reality that they had no mechanism to aggregate and view the related transactions of all the trading parties across all the interconnected markets. A new causal variant appeared for the first time, the use of computerized mathematical models to arbitrage price discrepancies between markets. This technique, known as index arbitrage, was an early form of algorithmic trading. This was to be the first of many more mathematically driven contagions to come.

The 1999 Long Term Capital Management crisis was also created by over confidence in mathematical models left to run in real-time across globally connected markets.22 Relying on past correlations and a newly minted stochastic risk management theory of Value-at-Risk, this trading strategy nearly collapsed the known global economy at that time, precipitated by Russia defaulting on some of its debt. The industry driven rescue plan instigated by the Federal Reserve prevented a disaster of near epic proportions.

The earlier 1987 market crash spawned many government, industry and private studies that led to the observation that the financial industry was driven by increasingly automated processes and interconnected through global communications networks. A project of that era lasting for nearly two decades, initiated by The Group of Thirty, a private think tank made up mainly of retired heads of state and central bankers, focused on eliminating risk in the interconnected financial system.  In their 2006 final monitoring report The G-30 concluded that the implementation of reference data standards had proven difficult and that greater efforts by market infrastructure operators and international institutions with global reach would be needed to resolve this issue.

The G-30 statement would prove prescient when in 2008 the collapse of the global financial system, in part driven by loose mortgage underwriting standards and further seeded by financially engineered derivatives products, again exposed regulators to the lack of transparency from missing data and multiple identification standards. Differently identified mortgage originators, trading counterparties, and mortgages themselves, made an audit trail from product origination through to their securitization markets impossible.25 The  lack  of  an  audit  trail  across  interconnected  markets  surfaced  again  in  the  “flash  crash”   incident of 2010.26

The risks that both incidents exposed could have been mitigated if data and identification standards were in place to aid in traceability: in the former case being able to identify a toxic sub-prime mortgage defaulted  on  in  a  tranche  of  a  securitized  bond  sitting  on  a  bank’s  balance  sheet;  and  in  the  latter case being able to identify the same trader and his trades, and its beneficial owner operating across different trading markets.

The problems that arose might have been more quickly resolved with a true picture of what had happened, thus minimizing damage and recovering more quickly. In the best case computers monitoring markets and financial positions could have been proactive in early warning triggers that could prevent damaging the financial system. This is, in fact, the lesson learned and the objective for the future of systemic risk analysis.

The US Government’s Role in Counterparty Identification Standards

The  US’s  Dodd-Frank legislation enables a new entity, a branch of the Treasury, the Office of Financial Research (OFR) to carry out research on systemic risk.  In its first initiative the OFR has called for an industry-government partnership to create a global LEI system.  Their notices of inquiry in anticipation of rulemaking by July 15, 2011 reached out to global leaders, practitioners and standards setters to provide the guidance and deliver on the consensus they sought from the industry for such an identification standard and system.  Furthermore, while their perch as rule makers is US centric, they had decidedly taken a global perspective through embracing the implementation as one to be carried out amongst all sovereign financial regulators.

While observing the problem as a global one, the US regulators had no mandate to reach beyond their own domestic jurisdiction.  They recognized that while regulators have operated in their own local markets or sovereign jurisdictions, financial institutions operate across markets globally and know no such prescribed sovereign boundaries.

US regulators recognized that the issue is both an industry and a regulatory issue.  They saw that a common set of reference identifiers for counterparties and their traded products could yield significant efficiencies in both the public and private sectors.  They recognized that financial firms could eliminate the use of multiple proprietary reference systems and move to a single, widely accepted system.

They understood that the complete automation of back-office activities, that elusive mantra the industry calls STP – straight-through-processing, still remained elusive, in part because of the absence of universal identifiers. They came to understand that real-time trading-through-to-payment, which is desired to eliminate systemic settlement risk, can only be accomplished when STP is realized.

They noted that maintaining internal identifier databases and reconciling entity identification with counterparties is expensive for large firms and disproportionately so for small firms.  The absence of standard and universal identification had led to individual firms’ need for extensive mapping software and middleware to compensate for this fundamental missing infrastructure component. The consequences are enormous – huge additional cost and risk brought about by reconciling multiple identifiers across hundreds and, in the largest financial firms, thousands of automated and manual business processes.

At the same time that US regulators were identifying these fundamental and long festering data problems, the G-20’s  Financial  Stability  Board  was  focused on reforms in the global OTC Derivative market. They came to the same conclusions as US regulators concerning the fundamental problem of data quality and lack of global data standards for counterparties and the OTC derivatives products they trade in.

The data issues were again reinforced in January, 2012 when a CPSS/IOSCO task force endorsed the LEI concept for use in the OTC Derivatives markets.

Recent Failures Reveals the Significant Issue of Lack of Data Transparency

The LEI legislation was inspired by the revelation of what was found in the records of the wreckage of the Lehman Brothers bankruptcy. No consistency in identifying Lehman as a counterparty with others; no understanding of what relationships Lehman had with  others; no mechanism to associate all of Lehman’s products and businesses into a total view of the exposure others had to Lehman should it fail. All who looked into the books and records of Lehman, all the regulators, the forensic accountants, the bankruptcy lawyers, the creditors and the counterparties observed a huge swamp of risk and no way of measuring what they found.  And it wasn’t  just  Lehman; it was a fundamental flaw in the infrastructure of the global  financial industry – no universal identification of counterparties, their hierarchies of business ownership, the products they own, the monies they owe, the collateral they have pledged, the risks they are exposed to.

The Madoff Ponzi scheme was another example of opacity that exists in the financial system.  Alleged positions held at the Depository Trust Company, at the Options Clearing Corporation and at an options dealer in London could easily have been understood as not existing if each venue had identified the same Madoff entity with the same LEI.  And it could have all been done automatically and proactively, not waiting as it was to analyze spread sheets and questionnaires filled out manually!

The MF Global circumstance, still being unraveled, suggests transparency through computerized monitoring of transactions would have greatly benefited regulators if each such transaction was uniquely tagged with standard products and financial market participant identifiers. Computers monitoring transaction flows between financial institutions could have detected outflows from segregated customer funds accounts, monitored its intermediate and final destination points and flagged such activity as triggers against an ever increasing arsenal of computer detected patterns that did not fit with normal patterns.  What was impossible by human detection means alone would now be increasingly available as computers scan the same product/counterparty combinations across and within financial institutions.

Faulty data and multiple identifiers for the same data also create huge operational risk.  Transactions cannot be processed in any reasonably complete automated manner (the straight-through-processing – STP issue) and aggregation of data for risk and performance measurement is neither timely nor accurate.  This failure is compensated for by requiring human interaction and reconciliation procedures across all the business silos that comprise a global financial institution and in all the data providers’ input processing centers where hundreds of analysts interpret unstructured documents into data.  It is obvious that by first identifying the same counterparty and the same traded product with a unique, unambiguous and universal code, then streamlining the processes, automating the interactions, and reducing the incidence of faulty data associated with these codes operational risk can be minimized and proper aggregation can be accomplished.

Global Regulators and the Industry Responses

US and other sovereign regulators realized that global standards need global oversight.  The issue has now been positioned with the Financial Stability Board, a creation of the G-20 that has been given the global mandate to oversee the contagion of systemic risk. In keeping with this mandate, and recognizing its foundational role in aggregating risk measurement and systemic risk forecasting data, the G-20 has recently endorsed introducing a common global system to uniquely identify parties to financial transactions – the LEI system.

In the US the OFR has suggested that they prefer implementers of the LEI to be chosen through an industry consensus process and be driven through not-for-profit international standards-setting bodies (IRSBs).  Candidates that fit such criteria in the private sector that had come forward were the International Standards Organizations’ (ISOs’) Society for Worldwide International Financial Transmissions (SWIFT) that administers the Bank Identity Code (BIC); Association of National Numbering Agencies (ANNA) that administers the International Securities Identification Number (ISIN); and GS1 that administers the identification system in barcodes.

In the government sector candidates include such Standards Setting Bodies’ (SSB’s) as: the Basel Committee on Banking Supervision (BCBS), Committee on Payment and Settlements (CPSS), Financial Action Task Force (FATF), International Accounting Standards Board (IASB), International Association of Insurance Supervisors (IAIS), International Federation of Accountants (IFAC), International Monetary Fund (IMF), International Organization of Securities Commissions (IOSCO), Organisation for Economic Co-operation and Development (OECD), and the World Bank.  The FSB itself may also be considered an SSB.

A formal solicitation of interest by the OFR was responded to in January, 2011 by thirty-three individuals and organizations – industry utilities, data vendors, software firms and database companies, trade associations, law firms, consultants, university professors and others that had an interest in offering a solution or opining on one.

Two industry initiated efforts were conducted, one by a group known as the Global Data and Standards Alliance35 organized by Financial InterGroup, a joint venture development company, consisting of the largest global financial institutions, standards bodies including GS1, public corporations and auditors; and the other led by SIFMA comprised of financial institutions’ trade associations and their representatives.

The SIFMA-led group recommended the combination of DTCC, SWIFT and ANNA to provide both the numbering convention and the facility to house and distribute the LEI. While reportedly some twenty data vendors, technology companies, standards bodies and others submitted their statements of interest and responded to multiple iterative requests there was no public disclosure of respondents or responses.

The global identification convention that was recommended, identified as ISO TC68 17442, had not been completed nor had ISO working group members at that time opined on the identification number’s content and construction, nor have they as of this writing, other than it is a 20 character number containing two (2) check digits.  The G-20’s Financial Stability Board (FSB) is now organizing to oversee the LEI issue.  This followed a robust set of presentations made to them in late September, 2011, yet to be publically disclosed, offering ideas from financial industry and non-financial industry presenters.

The same ISO 17442 LEI standard has been recommended by industry advocates at the CFTC’s Technology Advisory Committee meeting and at the Macroprudential Toolkit: Measurement and Analysis conference sponsored by the OFR and the Financial Stability Oversight Council, both of which were conducted this past December, 2011.  The CFTC subsequently issued a Notice of Proposed Rulemaking (NPR) on the LEI and other unique identifiers it needs to oversee the OTC derivatives markets.  The CFTC had referred to the LEI as the UCI – Unique Counterparty Identifier but has now deferred  to  the  OFR’s  term  for  it,  the  LEI.  On January 13, 2012 the CFTC posted its final rules in the Federal Register. In referring to the FSB’s take up of the LEI issue it made the final rule on adapting the LEI subject to modification based on the FSB’s  recommendations  as  it convenes its own expert panels and finishes its work.

The G-20’s  Financial Stability Board, now focused on the LEI, is interested in protecting the public’s interests in representing its member finance ministers and central bankers in an appropriate governance framework.  They will work at defining requirements for the LEI in the spring of 2012 for decisions to be taken at the G-20’s June 2012 meeting.

Risk and Cost Benefits of Lack of Global Identification Standards

Standards for uniquely identifying counterparties are critical to systemic risk analysis as it will permit timely and more accurate data aggregation within and across financial institutions. Associating the counterparty identifier with valued position and cash flow data will create a first time capability to consistently and persistently aggregate and analyze data.  It is expected such analysis will allow for observing early warning triggers of systemic contagion building up in the financial system.

In addition, huge duplicate expenditures exist for each firm supporting their own sourcing, cleansing and maintenance of the many reference databases within the business silos that collectively make up global financial institutions.  In research conducted before the financial crisis, the estimated cost to the largest financial firms was $1⁄4 to $1 1⁄4 billion per firm annually.   This expense is probably larger now given the combinations of even bigger firms that ensued since the financial crisis.

With the G-20 now overseeing a global implementation of the LEI it remains to be seen how the recommended industry grouping would respond in meeting the G-20’s  intent to assure an appropriate governance structure representing the publics’ interest.  With other finance ministers and central bankers to be considered and confidentiality and global distribution a more prominent goal amongst sovereign regulators, perhaps it is now time to look to successful global identification implementations in other industries and economic sectors.

Lessons Learned from Other Global Identification Implementations

In industries and businesses outside finance, global identification is best practice.  Walmart, Federal Express and Amazon are examples of leading transformational companies that have streamlined their own businesses while driving their respective industries toward its equivalent of STP.  They could not exist in their current form at such scale without the manufacturer’s  identity, universal product codes and unique delivery location numbers imbedded in bar codes.

The phenomenon of the Internet’s order-to-ship-to-deliver process and the revolutionary ubiquitous smart phone scans at airline counters and checkout counters are at its core enabled by a simple unique computer readable numbering convention. Such identification schemes are manifest not just in bar codes, but also in internet addresses, the global positioning satellite coordinate system and the global mobile phone network’s calling scheme.

The  financial industry’s equivalent of the bar code, the XML variant XBRL data tagging language, and the FpML data tagging language is beginning this same transformation in the financial services sector. Both FpML, extensively used in the OTC derivatives market, and XBRL, extensively used for financial statement reporting is becoming a de-facto standard.  XBRL is now mandated to be used in financial statement filings to the SEC.  Nearly 75% of global regulators now require some form of automated financial reports of accounts to be filed in XBRL format.  The CFTC is moving to mandate similar use of FpML to define Swaps and other products.

Global identification and standard data tagging should become as foundational and have as profound an effect on financial trade as the creation of the unique numbering system in the bar code and in the Internet addressing scheme had on commercial trade. It is these examples that inform our suggestions below for the LEI standard and its assignment mechanism, distribution network and governance structure.

A Suggested Framework for the LEI Global Standard

The LEI is to be a global standard for assigning, describing and identifying financial market participants. It is desired that the LEI system and its initial extensions to OTC derivative products, be built foundationally on a “number”  that  is  globally  unique with an associated indicator of parent-child relations in their hierarchies of ownership.  Further the LEI system should protect the confidentially of those business hierarchies and their percent ownership in jurisdictions that require this.  Beyond this is the need for a global standard for financial products, starting with swaps and other OTC derivatives contracts (the Unique Product Identifier – UPI requested by the CFTC). Standardized formats for reporting financial transaction and position data are to follow. A further component is necessary, data tags that allow a computer program to search and find the product or counterparty and then aggregate its associated values.

Below are general requirements of the LEI as advocated by regulators and industry members alike and how these may be accommodated in a global identification system:

Governance: One of the lynchpins of global financial reform is to attract the commitment of sovereign regulators in support of common purpose.  This approach has some precedent, the Basel capital accord, the World Trade Organization, the IMF as examples.  Another way is for financial institutions to agree to abide by common purpose as demonstrated in precedents of the ANNA federation and the Internet’s FIXML messaging conveyance of financial transactions. Realistically, without sovereign regulators relinquishing their sovereignty to a global regulator, or to a central but “too-big-to-fail” utility, the best practice way to implement the LEI is through a federated operating model.  Such a model has precedents in the financial industry and elsewhere. It can be fostered through global consensus, administered by sovereign regulators in partnership with financial market participants, and implemented in a parallel way over the Internet, itself a federated model.  The arrival recently of the FSB as the central figure in forming global consensus around financial reform makes global implementation around this model feasible.

The governance structure that oversees the LEI is most critical to protecting the financial system and is an important decision yet to be made.  The financial system is as important to the global economy as the electric grid or the internet is to commerce.  A consensus approach would be much easier to arrive at when all parties are represented in the debate and existing known issues are finalized.  The governance structure would be much easier to define and more apparent after an LEI data standard and its operational systems are agreed to.  The Financial Stability Board, which has accepted the responsibility to oversee the global rollout of the LEI should be resourced and fully operational and, thereafter, given the responsibility to issue requests for proposals to solicit bids on both the governance structure as well as the operational and technical components of the system.

Administration and allocation: The core set of numbers – the Registration Identifier (RID – one of the two parts of the LEI – see further details below) is to be administered by sovereign or regional regulators, each within their own jurisdictions, to be assigned individually to financial market participants in their jurisdiction. This global allocation to regulators is to be done once at initiation of the LEI system by the designated agent/registrar on behalf of the governance entity or by the regulator/ government itself.  A global standards body, or global trade association or other trusted institution under contract with one of a number of global institutions (i.e. BIS, IOSCO, FSB, WFE, etc.) could centralize and administer the distribution of the core RID numbers to regulators or their agents.  The distribution of each block of RIDs in this manner would precede a census on the number of financial market participants in each jurisdiction so that a proper range of numbers for the RID could initially be assigned in each jurisdiction.

Self-registration: This is the process by which a counterparty, issuer of securities, contract market operator or other financial market participant identifies itself through reference to its initiating documentation: articles of incorporation, broker/dealer license, bank charter, or account opening forms with a financial institution. The financial market participant or any approved certifying agent (see Certification below) that already obtains this information (i.e. NFA, FINRA, NYSE, DTCC, et al) could be used to register these details accurately on behalf of the financial market participant.

It is proposed that there be two components to self-registration.  This is to be done to enable a control mechanism against false registration and to assure global uniqueness.  The first component is the registration of a unique identifier (RID) as described previously.  The second part of the number is self-assigned by the market participant or its designated Registration Authority (again see Certification below).

The RID (the first part of the LEI identifier) is to be assigned by sovereign regulators themselves and/or through their designated Registration Authorities (RAs) where such institutions already exist.  Where acceptable, RA status can be assigned by regulators to others, perhaps in a meaningful partnership with for example, the members of the World Federation of Exchanges or in collaboration with major public auditing firms, or some other trusted outsourcer that has operational capacity in each jurisdiction.  All of these are already globally trusted organizations at the front end of the initiation process of establishing and reporting on business formations.

Certification: Assurances on the identity of the market participants is required.  Here, we advocate for auditors, law firms and/or designated certifying agents.  Perhaps such certifying designation can be bestowed on existing market center operators (exchanges), or local or global standards bodies or infrastructure financial market utilities.  In reality auditors, law firms and listing exchanges are already at the front lines in observing the creation of legal entities and may be preferred as they would tend to minimize information leakage.

No Intelligence – the number itself should have no intelligence in it – no country or issuing agency code, no ability to parse the number to determine meaning. All changes that occur are to be contained in the associated reference data.  Change the reference data, not the number and the number can persist for all times, providing a meaningful audit trail for any and all changes that occurred.  While there will be a minimum set of reference data to be associated with each completed RID/LEI combination to be able to have human understanding, it does not come from the number itself.

Confidentiality – the number itself needn’t be confidential, but more importantly the parent/child relationship might need to be. This information and eventually the reporting of percent ownerships in a business ownership hierarchy are thought of by some companies and countries to be confidential information, especially those countries that have government owned businesses, have established non-taxable trade zones, have regulated secrecy of business ownership, etc.  Sovereign regulators and exchanges (and their auditors) are already privileged observers of this information and would be best positioned to protect confidentiality provisions of globally agreed to and locally regulated LEI confidentiality rules.

Legacy System Consistency – the manifestation of the LEI in computer databases for use as search and storage keys, and for use in communication networks, should be backward compatible with best practices proprietary standards that exist today.  The consensus of such existing standards is for a standard code no greater than 11 characters.  The internal number to which every firm now normalizes their multiple identifiers in their own databases will initially be the mapping source to the LEI. Eventually the LEI will become the exclusive number for both internal as well as external use.  A proposed structure for the LEI’s unique, unambiguous and universal identification system is further described below.

The Suggested LEI Identification System

The proposed LEI identification system consists of a fixed length of 11 digits/characters within a two part construction as previously outlined.  The first portion of the number, the Registration Identification (RID) consists of six (6) characters (or five if conflicts with symbols are not to be considered in extending this system to OTC product identifiers).  The LEI extension is an addition of five (5) characters (or six if conflicts with symbols are not to be considered regarding the RID).  The total number of assignments using 30 digit/alphabet combinations comprised of first the digits 0-9 and then the western alphabet (excluding I, L, O, Q, V, and Z so as not to be confused with look-alike numbers), is 729 million RIDs and for each RID 24,300,000  LEI’s.  Using  just  digits, which is how we would suggest initiating the assignment process, would result in 1 million RID’s and 100,000 LEI’s for each RID.

This two part assignment allows regulatory oversight in assigning the initial digits so regulators are assured that each financial market participant within their jurisdiction matches to a regulated financial institution At the same time this two part assignment approach allows financial institutions the freedom to create and register LEIs for legally dependent entities by using the remaining digits without having to return to regulators for an RID for each LEI assignment.

Backward compatibility with legacy systems is fully accommodated by the identification system proposed here.  The 11 digit construct fits into the space of SWIFT’s BIC code, S&P’s CUSIP Issuer prefix and CABRE numbers, ANNA’s ISIN issuer prefix numbers, DTCC’s AVID number, the LSE’s SEDOL number, Dun & Bradstreet’s DUNS numbers, et al.  When and if the number of digits is exhausted in any one sovereign jurisdiction it can be extended by simply assigning letters to expand the available identifiers.


In many jurisdictions the parent/child relations and potentially the reporting of percent ownerships, are thought of by companies and countries to be confidential.  Also official business registries are maintained by sovereign regulators or their central banks and/or finance ministries.  These entities, at the discretion of the local government, can be assigned the duty of Registration Authority and either maintain the databases in a server locally, or outsource it to a facility of their choosing.  In all cases the facility, whether local or more centralized would be networked in a distributed data model for access by all with appropriate permission.

Technology to Support the LEI Standard and System

One approach to supporting a global implementation of the LEI is to overlay the application on the Internet, and more specifically, in an analogous way as the network of the World Wide Web is overlaid on the Internet.  The Internet is a connection of communication networks following the same transmission protocol, the TCP-IP protocol (the Telecommunications Internet Protocol) that allows packets of information to take various routes to find its ultimate destination (known as an Internet address).  The World Wide Web is a business application that uses this network and communication standard to assign and translate human readable web site domain names (the Domain Name Server system) into IP addresses (numbers much like telephone numbers) to locate computers (webservers) that contain information (web pages) describing the websites’ information.


The LEI application would be implemented in similar fashion as Internet addresses are recorded and resolved in the Domain Name Server (DNS) system and their corresponding Web pages pointed to and retrieved in the webserver system.48 In order to resolve the human-readable names to the machine-readable addresses, a DNS must look up the alphanumeric name and retrieve the numerical address.  This responsibility does not lie with a single server however.  Instead, the DNS system is a distributed hierarchical system of multiple DNSs in keeping with the resilience of the Internet itself.

Combining paths previously pioneered by such global industries as consumer goods, scientific journals and entertainment industries, designated Registration Authorities could assign RIDs and upload them onto local, regional and/or global DNS-like servers (preference for each approach being a function of sovereign regulator confidentiality and secrecy laws).  In turn these RID servers would point to LEI DIS servers containing minimal regulatory data sets and to DISs with more complete reference data sets for operational purposes, administered by Reference Data Registration Authorities (RDRA’s), some government owned and some operated by the private sector, but all tied together and readily available as a contiguous whole, a single representation globally accessible – a central counterparty of reference data, much like the Internet’s World Wide Web or email services.

Implementation of the LEI and its Reference Data

We look to how XBRL is used now in financial statement reporting to inform the LEI implementation. XBRL is a data markup language intended to provide metadata (descriptive information) about the data itself. Markup languages are annotations added to textual material usually to indicate structural detail or presentation specifications. The standard generalized markup language is an ISO standard defining generalized markup languages for documents.

XBRL is now used by many of  the  world’s regulators and many exchanges to transform reports of the statement of financial condition into computer searchable data. These same regulators and the key financial personnel at submitting entities can be seen as having a role in the LEI, especially as the basics of this information is already reported in annual reports to the SEC in the US.

The source institution would supply this information and after certification can be imported directly into the Legal Entity Identifier (LEI) Registry.  Reference data beyond the minimum regulatory data required can be included to provide a more robust data set, i.e. tax-identification numbers, delivery location, web address, corporate executives, links to financial statements, etc.

Exchanges, coincidentally, are requiring XBRL financial accounts reporting and they are the one category of financial intermediary most often at the front end of the financial transaction supply chain. They are in an excellent position across the globe to interact with sovereign local regulators in overseeing the RID portion of the registration of LEI’s.

Following the XBRL example we can translate the LEI and its data attributes into a standardized XBRL template. For the LEI Registry a set of data attributes currently defined by regulators and industry participants would be prescribed within the initial instance of the XBRL taxonomy and accommodated in an XBRL template. Below is an example of content of a LEI XBRL Taxonomy: Such direct input it could well spur the industry’s financial institutions to think of establishing a broad utility, not just a Registry of Identifiers (RID) or LEI Registry, but more complete in respect of all the data attributes necessary to perform the myriad of operational processes necessary to make an identification system useful as a business specific application processing system.  As more prospectuses, offering memoranda, financial event announcements, etc. are translated through XBRL templates into direct input as reference data, the facility emerges over time as a complete reference data repository, a “central counterparty” of data to minimize the risk of using multiple versions of non-standard data.

The actual LEIs hierarchical ownership structure could, where required by regulation, be redacted into a common form as is done in other industries where competitive data is to be aggregated and publically disseminated.  A private-public security key can be associated with the redacted identities and used for public distribution.  Approved regulators, observing early triggers of undue risk exposure can obtain the redaction generator key to discover the source of the exposure and do more detailed analysis directly with the financial institution or counterparty.

This same two part construct and system to support the LEI had been identified early in 2011 in the regulatory process in response solicitations of interest by the OFR, CFTC and the SEC.  In these submissions it was shown how the system could, for example, be extended to be used for product, financial event and transaction identification.


A global identification system is the pillar of future risk management systems, offering a means of risk aggregation.  Given such a system, regulators will finally be able to have the transparency they require to see into financial transactions and understand risk exposures as they accumulate within and amongst counterparties.  It is hoped that triggers of early warnings of the types of systemic risks encountered in the past, and recited earlier in this paper can be observed and future crisis mitigated if not prevented entirely.  However, the technical requirements of such a system are dwarfed by the need for the political will of industry executives and regulators to pursue such a system of financial transparency and to overcome skepticism and past failures.

With global identifiers as a starting point industry members may be next moved to support industry utilities with common reference datasets for each identifier.  This can then provide the potential for fundamentally restructuring the largest financial institutions by removing the duplicative, costly and risk prone reference data infrastructures that each financial institution supports for no strategic value.  This would be useful to limit systemic risk, a key objective promoted in the Wall Street Reform and Consumer Protection Act (Dodd Frank Act).

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