TORONTO, Can. – “I love standards … especially because there are so many of them,’’ remarked a former colleague of mine.

Standards, whether for messaging, identification, or reporting, facilitate intra- and inter-institution communications and reduce corresponding cost of trade failures. They also enable accurate aggregation of data, critical to understanding exposure and managing risk.

But incorporating new standard identifiers into the existing soup of overlapping symbologies presents data management challenges to financial institutions. It’s not a matter of retiring old standards and replacing them with new ones.

Very soon, the industry will confront a new standard identifier for legal entities, with new regulations requiring this identifier in reporting financial transactions.

This will have to be incorporated in databases alongside many other symbologies for issuers, customers, counterparties and financial intermediaries.

How to Prepare?

Right now, financial institutions maintain their counterparty databases by subscribing to a proprietary vendor feed, inputting and managing the list manually, or a combination of the two.

Different systems and different departments may maintain their own data sets, and rely on their own preferred symbology.

Each area “speaks” in the language it prefers, or in the language it has been trained to speak. Such a method works until it is time to “speak” to a different department or institution who knows a different language. That’s where communication tends to fall down.

One approach is to convert each department, system, and institution to natively speak one language. Such a project is costly and time consuming. Systems need to be modified, interfaces need to be mapped differently, and people need to be retrained. It’s also not possible in cases where multiple symbologies need to exist for different purposes, as in the case of the BIC and the LEI.

The more practical approach is one of cross-referencing. Leave in place each departmental, system-specific, and institutional preference, then link each existing identifier to a new standard identifier.

Within a department, that department’s symbology may be used. But, when talking between departments, the universal identifier becomes the standard.

There are specific activities firms can do now to prepare for the new standard. Existing customer and counterparty databases will need to be enriched with cross references to the new standard. This task is easier if the existing customer and counterparty databases are accurate and up to date. A review, data cleansing and in some cases database consolidation project will make the process of mapping in the new identifier easier.

Additionally, a data management and data sourcing strategy needs to be devised. How flexible is your current data management framework? When data vendors enhance their feeds to supply the new standard identifier for each legal entity, how many interfaces will you need to change?

Implementing a flexible framework today reduces the impact of a new standard. This reduces the number of interfaces which need to change, reduces the effort of adapting to modified vendor feeds, and facilitates cross-referencing across symbologies.

To get ready for one more standard, firms do not need to convert a large number of business applications. Instead, they can just review and cleanse their current counterparty data and make sure that their data management framework is sound.

Flexibility is key. SWIFT, for example, has chosen not to adapt its existing bank identifier code to become the new identifier of legal entities of all types. So different languages will be needed in different contexts, but a universal language is required.

Esperanto was intended to be a universal second language, for the spoken and written word. This didn’t happen because the need wasn’t critical. With legal entity identifiers, there’s a compelling need. Which means there’s a chance for it to become universally adopted.

Being the primary language matters.

Which means: Make it easy to be universally adopted.

This column originally appeared on Securities Technology Monitor.

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