How is the financial services industry reacting to the implementation of LEIs?
LEIs are just another example of a large structural project that is being rolled out on a global basis. They are already mandated in derivatives reporting regulations in the US and Europe but will soon be enforced in both of these jurisdictions as part of other regulations, including MiFID II, CSDR and SEC reporting for US registered investment companies.
What has become apparent is that some market participants, even at large organisations, haven’t yet realised just how commonplace LEIs will be.
Looking in particular at MiFID II, no firm will be permitted to place a trade without having a valid LEI code at the time of sending the order. That LEI will remain within all the record-keeping throughout the trade flow, and there will be an LEI code attached to every single piece of transaction data. It will certainly be incredibly useful.
Currently, some data is standardised while some is not. When an order is placed on an exchange, the broker does not need to know who the client is—that comes with the allocations as subsequent data. The whole process is made up of disconnected sections—the broker, the exchange, the client, the custodian, the CSD and the CCP. Some of these are connected and some are not.
The data model is discordant, but it was never designed as one holistic, whole thing. LEIs are intended to correct that disconnect, but they will have to be mandated in order to do that.
Some market participants already have a proper data strategy, complete with LEIs, in place. Others, particularly small buy-side firms and corporates, haven’t yet realised that this is going to be mandated and haven’t yet started to make preparations to comply with the directive.
What about UPIs and UTIs?
Both UPIs and UTIs are far earlier on in the development stage. They will eventually be mandated in exactly the same way as LEIs, and they will also bring enormous benefit to the market.
At the moment, UTIs only address OTC derivatives market, because that is where the regulatory need is. However, it's interesting to consider whether the UTI process can be applied to other asset classes, such as equities, fixed income and foreign exchange, and whether those asset classes represent the same level of risk and opacity that exists in the OTC derivatives market.
I believe it will be a successful project but it will take time as it will require global structures, governance and alignment.
How much difference will successful implementation really make?
LEIs, UTIs and UPIs are needed to propel the financial services industry out of the Stone Age and into the industrial revolution. Our industry needs to embrace these data standards and the standards need to be mandated globally.
This requires constituents from all corners of the financial community, including regulators, market participants, infrastructure providers and other technology firms to collaborate in the implementation of this project.
There’s a realisation that, in comparison to other industries, when it comes to data we, the financial services industry, is far behind. If you consider the aviation industry; airport signs, lights and rules are the same all over the world. That didn't just happen by accident; it happened through industry standardisation projects.