With little information emerging from the Regulatory Oversight Committee (ROC) on how a central operating unit (COU) would work as part of a global initiative for new identification codes for business entities, market consensus appears to have emerged suggesting a virtual model for data distribution is the best way to move forward.
Under such a scenario, the actual ID codes and reference data, would be accessible by financial firms through a front-end portal with local numbering agencies or registration authorities in each market communicating with each other behind the scenes.
“It’s a far more efficient idea than concentrating data into a single location with vested interests,” says one data management expert at a New York-based global custodian whose stance was mirrored by two dozen other specialists across the globe surveyed by FinOps Report.
FIXing Data Distribution
Spearheading the idea is the FIX Trading Community, the trade association promoting the use of FIX message types for trade execution and local matching of securities transactions before settlement takes place. The group has already upgraded the FIX 5.0 message type for the global LEI initiative.
“We are recommending that the FIX protocol be used by the global LEI system as the standard for market participants to access pre-local operating units and local operating units through computer-to computer automated links,” says Chris Pickles, co-chair of the global education and marketing committee for the FIX Trading Community. “Doing so, allows market participants to rely on a free and open industry standard that they have already developed themselves and that they already use themselves rather than having to develop new protocols and software for each pre-local operating unit or local operating unit.”
Regulators are espousing legal entity identifiers as the best means for keeping track of the financial exposure of organizations worldwide to mitigate the potential that the failure of one will cause a global economic downturn. Relying on the current hodgepodge system of multiple standards for identifying trading partners is far too risky.
Envisioned by the ROC as the linchpin for a global identification system for legal entities, the COU’s exact operational framework was never clear beyond the premise it would ensure standards for LEI issuance in local markets through local operating units, otherwise know as LOUs. The ROC suggested the COU could outsource any of its technological requirements on a consolidated database of LEIs to a third-party.
So far, a handful of so-called predecessor or pre-LOUs have sprouted, including the US’ CICI Utility; Germany’s WM Datenservice; the London Stock Exchange; and France’s INSEE, which have been coined pre-LOUs. Presumably, they would eventually morph into LOUs once a global LEI infrastructure is finally implemented.
After taking over the role of overseeing the development of the global LEI initiative from the Financial Stability Board in January 2013, the ROC did issue a request for nominations for members of the board of the COU, which will be based in Switzerland. Industry sources close to the ROC say it recently selected those members, but so far they have not been publicly identified.
It’s All Virtual
Relying on a virtual data distribution model naturally eliminates natural contenders such as Depository Trust & Clearing Corp; SWIFT, and the ANNA Service Bureau — from taking on the role of COU operator. The reason: an operator might not be necessary as there would be no central database to store all of the legal entity identifiers. DTCC, the US umbrella organization for clearance and settlement and SWIFT, the global messaging network, jointly operate the US’ CICI Utility to issue IDs for swap market players.
Comprised of the US’ CUSIP Global Services and Switzerland’s SIX Financial Information under contract to ANNA, the ANNA Service Bureau consolidates international securities identification codes (ISINs) for financial instruments assigned by local numbering agencies in over 100 countries. ANNA, short for the Association of National Numbering Agencies, is both the standards authority for ISINs and CFIs and the umbrella organization for national numbering agencies in each country.
Three years ago, a group of global trade associations led by the US Securities Industry and Financial Markets Association picked ANNA along with the Depository Trust & Clearing Corp. and SWIFT as the dream team to implement a legal entity identification organization for the US market, but its role never materialized. When DTCC and SWIFT won the Commodity Future Trading Commission’s blessing in 2012 to launch the launch the US local operating unit assigning identification codes for swap market players, ANNA’s presence in the planning for for a global LEI initiative seemed to fade.
While no one disputes the ANNA Service Bureau’s ability to run a consolidated logical database for LEIs on behalf of the COU, chances it will do so are close to nil, for more reasons than just the merits of a virtual database. The affiliation of CUSIP Global Services (CGS) with ANNA Service Bureau makes such a role an anathema, some European financial firms tell FinOps based on a heated five-year battle over alleged excessive licensing fees for ISINs for US securities. The conflict ultimately reached the European Commission with CUSIP Global Services finally settling in late 2011 by offering a lower-priced condensed version of its ISINs for US securities for European users.
Here is how FIX Trading Community envisions a virtual data distribution model, according to Pickles, who also heads up industry initiatives for global banking and financial markets at UK telecommunications giant BT. Financial firms and other organizations needing LEIs would apply for a legal entity identifier through their local numbering agencies or other local registration agencies, as is currently the case. Should they wish to access LEIs from any other country, they could still do so through their local numbering agency or registration authority which, in turn, would forward the request to another numbering agency or local registration authority using a dedicated upgraded version of the current FIX 5.0 message type. The request would presumably be processed in close to real time and the information provided would reflect not only the LEI, but also the current reference data allowable by national privacy regulations.
“It is expected that pre-LOUs and LOUs will start their operations by offering web-based keyboard interfaces, which is already reflected in what they have been doing so far,” says Pickles. “However, once firms want to integrate access to LOUs in their automated business processes and risk management workflows, the protocol they use for accessing LOUs becomes an issue.”
Of course, FIX Trading Community’s idea implies that each of the numbering agencies or local registration authorities is technologically capable of using FIX messages and if not, they could accommodate their infrastructure quickly. It also doesn’t take into account any overseeing body to monitor whether local numbering or registration agencies are following the ROC’s policies.
Pickles could not elaborate how quickly such organizations could prepare or whether they might need help from yet another technology provider to manage the translation of disparate message types. FIX Trading Community is part of an initiative coined P-lei.org, which offers free access to pre-LOUs on its portal; other sponsors include standards giant GS1, best known for retail barcoding, and Tahoe Blue Ltd, a risk management and financial technology consultancy. “This solution can be used by the pre-LOUs, LOUs and COU,” says Pickles.
Although FIX Trading Community has yet to present its idea to the ROC, it already appears to have found an ally in SWIFT. “There are three ways a COU organization could operate: either a centralized database, regional databases or through a virtual data distribution model,” concedes Paul Janssens, director of the LEI initiative for SWIFT. “Based on current technology, a virtual model appears to be the best of the three ideas as it would be more cost-effective and avoid having a central location where all the data is stored.”
So far, the CICI Utility and WM Datenservice are storing information on pre-LOUs issued by the other organization. The consolidated databases represent about 90 percent of the pre-LOUs issued so far, says Janssens.
Markus Heer, director of WM Datenservice, Germany’s national numbering agency and a member of ANNA, is hesitant to endorse the FIX Trading Community’s proposal, but does call the idea “interesting.” So far, ANNA has not taken a public stance on who should operate the COU, but it also appears to have been excluded from the ROC’s decisionmaking process. Heer confirms that none of ANNA’s members are represented on the COU’s board, as per the ROC’s requirements. In fact, knowledge of data management and governance is surprisingly not top of the list of criteria for COU board members. Instead academic, fund-raising and corporate-building expertise is favored.
Dan Kuhnel, chairman of ANNA’s board, deflects the question of ANNA’s interest in a role in the COU with a question of his own. “How is the ROC or the COU board planning to manage day-to-day oversight and support of a global network of LOUs?,” he asks.
Kuhnel, who is also director of primary markets and international fixed-income securities for international securities depository Euroclear, says that ANNA’s decades- long experience in globalizing the ISIN standard indicates there is considerable, hands-on work involved. “In our case, we have managed to get it all done with volunteer labor, since we are all national numbering agencies. This model is clearly not going to be in effect with the COU and LOUs,” he says.
Noting that the challenges range from bringing up issuers in countries with problematic business practices and laws to solving continually emerging business and technology issues, he adds, “Perhaps we were lucky in the relatively independent structure of ANNA, which operates as a standards authority under contract with the International Standards Organization. Beyond compliance with standards and related principles, the membership of national numbering agencies work together to solve their own problems for the good of the capital markets they serve. The LEI is being introduced in a quite different political environment, and it will be interesting to see how the structure and workforce of the COU evolves.”
Allan Grody, president of Financial Intergroup, a New York-based risk and data management consultancy agrees that the reference data elements in the files supporting the legal entity identifiers could be marked with FIX protocol tags, but suggests that the concept of a virtual distributed data model be based on the design on the DNS system that runs the worldwide internet.
“The COU as we envision it is not a single place for data to be stored, but is one of many peer-to-peer servers that will contain routing directors,” he explains. “The COU will define minimum technology standards so all LOUs can interoperate through a common protocol within specified throughput rates, latency criteria, and adhere to common security and privacy regiments. Also common XML tags will be required, which is where I see FIX coming in, defining tags for common data elements.”
However, the LEI is just one data element to help regulators monitor systemic risk, says Grody. Also critical in the design his company has made public are the unique product identifiers (UPIs) which would be housed in the same real-time in-memory servers where each LOU will house the LEI register. The UPI register for financial products and transactions would be accompanied by data, such as cash flows and valued positions. Such a scenario makes systemic risk analysis that much easier, because financial positions would be aggregated by LEI and UPI.
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