Legal and regulatory update: Global identification standards for counterparties and other financial market participants

Abstract

Financial regulators are focused on observing systemic risk across enormously complex interconnected global financial institutions. 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 standardised legal entity identifier (the LEI) is the first step. This paper reports on past and current efforts to develop a global identification system for such a purpose. The authors argue for a government/industry partnership in which governance is shared and operating elements of the global identification system are compartmentalised for control, security and confidentiality purposes. The paper demonstrates a proposed global identification system that satisfies all known elements of regulators' requirements for the LEI and also lays the foundation for accommodating other attributes, such as business ownership hierarchical structures and contract and instrument identification.