David Strongin is worried about inefficiency. And the prospect of "double validation.''

The managing director of the Securities Industry and Financial Markets Association (SIFMA) wants to make sure that the global system for identifying participants in financial market transactions gets up and running in the best fashion possible.

This is what is called the "legal entity identifier" or LEI program, being pursued by regulators the world over. The 35 recommendations developed by the Financial Stability Board, which is coordinating international efforts, will be presented at the Los Cabos Summit of the leaders of the G-20 industrial nations, which starts Monday.

That FSB is recommending a 20-character identification code, as set out by the International Organization for Standardization. And governance of the registration, issuance, collection and storage of the IDs, under its proposal, will be handled in a three-tier organizational structure. The hierarchy: a regulatory oversight council, a central operating unit and local operating units.

The local units will be national or regional authorities that take in applications for the codes, send them back to the market participants and keep track of them.

The central operation will make sure the global standards and protocols that get adopted are adhered to and create processes and protocols that will govern how local systems connect to a central hub.

This is where the "inefficiency" that Strongin worries about comes in. Each local operating unit should be operating in the same manner, kind of like a chain of McDonald’s outlets, to make sure that all specifications are followed and all fields of information filled out the same way, recorded the same way and distributed accurately and efficiency. Each code has to be unique. Each code has to identify just one entity. Or the whole system falls apart.

Making sure every outlet operates in the same fashion, when it comes to producing a uniform product, is not easy, as food chains throughout the world can attest.

The fear is that each code will have to be validated at the local level and then re-validated at the central operating unit, to keep the system honest, accurate and effective.

Double validation.

Here's how the Global Financial Markets Association, of which SIFMA is a part, put it in commenting this week on the FSB recommendations:

"GFMA commends the FSB for recognizing the need for a strong central
 control process to ensure the integrity of the data in the LEI database. In order for a federated LEI solution to be effective, it needs to be
 balanced to ensure that data quality and cost efficiency are preserved. As the FSB moves forward with implementation, it is critical that the Central Operating Unit (COU) maintain standards for data quality across jurisdictions.''

SIFMA and by extension the GFMA have backed an approach that is much more about registering and issuing codes from a central authority and then storing the records in a central repository. Its candidates for this central operation are the Depository Trust and Clearing Corporation and the Society for Worldwide Interbank Financial Telecommunications.

The DTCC is used to dealing with huge numbers of financial transactions, in post-trade clearing and settlement functions. The DTCC also has embarked on creating a series of global trade repositories for storing details of transactions on different types of financial instruments.

SWIFT, for its part, provides a worldwide network for distributing messages about those transactions.

At SIFMA's operations conference in Phoenix at the start of May, the DTCC demonstrated how this would work. Registrants would enter their names, addresses and other identifying information on a DTCC web portal. The information would get sent to SWIFT and SWIFT would send back a newly issued ID in about 20 minutes.

No muss. No fuss.

Having potentially scores of local registration authorities inherently means more muss and fuss. Oversight gets more complex. Making sure standards are kept up takes more oversight. There is much more room for error.

If you look at the numbers, though, the angst should not be overdone. This may be the linchpin of getting a handle on risks that emerge in the global financial system. But we're not talking Big Data here. Or that big of a data project.

While this is not quite complete, here's the basic scope of each record for each legal entity that is getting created:

  • Legal entity name
  • Address of headquarters
  • Address of where legal formation took place
  • Business registration identification
  • Name of business as registered
  • Date of first assignment of legal entity ID code
  • Date of last update of the LEI
  • Date of expiration of the LEI

Looks like maybe a thousand characters of information, tops. So let's quintuple that. Make it 5,000 characters of information per recrod.
Then, let's take the size of the universe – long term – that the SIFMA proposal of last year said is involved here. We're talking about 1 million legal entities, roughly.

5,000 characters per record. 1 million records. That, in computer terms, is 5 gigabytes of information, in toto. (See, "IDs on Overdrive")

So, sure, it may be 'inefficient" to double validate. But it's not that hard to take in the information from each registry, do a standards and accuracy check on it, and make a "golden copy" of the database.

In fact, you could make as many copies as you want and hardly feel the cost, the numbers indicate.

Right now, in my pockets, I have a digital camera with an 8 gigabyte SD card in it and a stick drive with the same capacity.

In fact, this database will be so compact at the start, with the number of registrants measured in the tens of thousands of entities at the start, that it wouldn't surprise me to find some technology vendor giving away thumb drives with the entire LEI database on it to next spring's attendees of the SIFMA Ops conference.

Technically speaking, it should be child's play for DTCC. This is an outfit that provides custody and asset servicing for almost 3.7 million securities issues from the United States and 121 other countries and territories, valued at $39.5 trillion. In 2011, DTCC settled nearly $1.7 quadrillion in securities transactions. DTCC has operating facilities and data centers in multiple locations in the United States and overseas.

"Our technology team has architected the system to be completely federated, and it is agnostic to how many servers there are and where they are located,'' said DTCC managing director Bill Hodash. "Our technology team has been delivering technology solutions in reference data for financial services firms, auditing firms and others for 10 to 12 years."

And in SWIFT's view, it still might make sense to issue the codes centrally. "As the LEI does not contain any intelligence, we would also expect the generation of LEIs to be done centrally with the possibility to issue and store these locally,'' a spokesperson said Friday.

If chosen to be part of the central operating unit, DTCC will find an efficient way to take and make copies of each registration that occurs around the world and make sure there are golden copies or exact replicas of golden copies at multiple locations on every continent, at little marginal cost.

Or it can keep a master relational database that just keeps track of where all the pieces are and points to them. Including backup copies.

As Strongin's colleague, Tom Price puts it, the challenge isn't technical. It's organizational.

"We're all heading in the same way,'' the managing director of operations and technology for SIFMA  Operations and Technology said of market participants, trade groups and other players involved in the process of creating the system. "We just have to make sure we end up with the right way.'

Besides, when it comes to protecting the linchpin of solving risks to the global financial system, double validation might just be part of the right way.

This commentary originally appeared at Securities Technology Monitor.

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