The LEI was conceived in the aftermath of the Lehman collapse in 2008 and onset of the current financial crisis. Regulators were stumped because they, and the firms they regulated, had no easy way of assessing exposure to Lehman as the events of September 2008 unfolded. After Lehman, the U.S. regulators had had enough and the Dodd-Frank Act passed in 2010, mandating that counterparties to trades in the financial markets be unambiguously identified in the trade data. This was all very well, but the financial system is global and a local U.S. solution would have been inadequate, to say the least.
Once this realization sank in, the problem was presented to the G20, which tasked the Financial Stability Board to resolve the issue. The FSB is chartered with promoting global financial stability by coordinating the efforts of national financial regulatory authorities. Its secretariat is housed in the Bank for International Settlements, the "central bank of the central banks," which is located in Basel, Switzerland, and, according to Wikipedia, is unaccountable to any national government.
An Invitation to the Fed
In early July, I noticed a solicitation from the FSB for interested parties to join something called the LEI Private Sector Participation Group. I immediately sent my resume to the FSB and, shortly thereafter, received confirmation that I’d been accepted.
At this point, I knew rather little about the LEI. To me, it was a 20-character identifier that had been defined in the ISO standard ISO 17442, and it had to identify every participant in a trade. It meant that financial institutions would have to modify their trade records to accommodate the LEI and create reports aggregating trade data to provide to regulators. There had been rumors about how the LEIs would be assigned, but few concrete details.
A few days after signing up to the PSPG, I was informed that the group was to meet July 25 at the New York Fed, where details would be revealed. This was lightning fast in my experience of international organizations. I duly attended the meeting, where the details were revealed, although Chatham House rules were in force, meaning that the points discussed can be reported, but not attributed to anyone participating.
The new LEI governance structure quickly came into focus. The G20 had endorsed the work of an Implementation Group (IG), composed of national regulators and international civil servants (i.e., those from the IMF). The IG was mandated to move the development of the LEI system to the stage of developing a charter. The charter is due to be presented to a G20 meeting that will occur in November. Assuming endorsement at that meeting, the IG will transfer its responsibilities to a Regulatory Oversight Committee (the ROC, pronounced “rock“), which will be the regulatory oversight body for the entire global LEI system. The ROC will have authority to “protect public interest,” with respect to the global LEI system.
Below the ROC will be the Country Operating Unit (the COU, pronounced “coo”). Like the ROC, there will be one COU in the world; it will be a not-for-profit private foundation. Apparently there is no desire to embed it in a multilateral organization, where it would be subject (essentially protected) by existing treaty frameworks. Therefore, the COU will have to be domiciled in one country, but which country? Apparently, there are discussions going on, but the names of countries under consideration were not revealed. The legal framework of the host country of the COU will have to be one that is unquestioned by the global community, which reduces the number of candidates considerably. The COU will be responsible for designing the operating procedures of the LEI system, assuring data quality and making sure the system functions well; it will oversee the LOUs.
Below the COU, at the country level, there will be one or more Local Operating Units (LOU, pronounced “lew”). A LOU can be a for-profit entity, although it could also be parastatal, or even a public sector entity in some countries. It seems that there is general encouragement for the LOUs to be private sector entities, akin to Internet domain registrars. There can be many LOUs in one country. Any organization that wants to participate in the financial markets will have to go to a LOU, pay a fee and get an LEI assigned to it. The LOU will have to authenticate that the registrant is who they claim to be, which will likely involve collecting a lot of data, in addition to that which is published in the LEI.
The LOU can sell any additional products or services it wants to registrants. It can monetize the data it collects from registrants in any way compatible with the laws of the jurisdiction in which it operates. A registrant will have to come back to the LOU once a year to revalidate itself and when there is a material change that may affect its LEI profile. The latter is important, because it represents the first uniform way for self-reporting corporate actions (e.g., mergers and acquisitions) on a global scale.
Hierarchies and Beyond
At a future, yet undetermined, date, the LEI will be extended to include corporate ownership hierarchies. It might surprise readers to learn that many large organizations are not aware of the legal entities that compose them and of the structure of the relationships among these legal entities. Large organizations may consist of thousands of “internal” legal entities. The regulators are clearly signaling that they want transparency in this area. The hierarchy issue represents LEI 2.0, whereas the issuance of the LEIs themselves, described above, is LEI 1.0.