BASEL, Switzerland, June 8 (Global Risk Regulator) – Global regulators want to launch a world-wide Legal Entity Identifier (LEI) system, which will tag the buyers and sellers in financial trades, by March 2013.
But the system, which aims to provide high quality information on transaction counterparties such as name, address and basic ownership data, is expected to take years to roll out fully and the degree of compulsion on firms will depend on individual jurisdictions.
The Financial Stability Board (FSB), the body charged with the coordinating the post-crisis global financial reforms agreed by the Group of Twenty (G20) largest economies, today issued a report on LEIs for financial markets in time for review by G20 leaders at their summit in Los Cabos, Mexico, later this month.
FSB chairman Mark Carney said an LEI system would be a building block for many financial stability and regulatory aims. This includes enhanced prudential supervision. As well as supporting better internal risk management, the report says, a common identifier will aid information sharing about firms between regulators and across borders. That will enable better supervision of cross border firms and firms whose business lines are overseen by multiple regulators.
It would also provide support for the orderly resolution of troubled financial firms. Leading bankers called on the FSB this week to strengthen its efforts to secure effective cross border resolution of major firms.
The report says the improved clarity provided by an LEI system on the internal structures of complex firms and on exposures by individual legal entities would aid better crisis management and resolution.
(The Institute of International Finance, the influential body that lobbies on behalf of the world’s top banks, called in a report yesterday for the FSB to mandate, not just urge, effective cooperation among jurisdictions on cross-border resolution).
Today’s FSB report, which responds to a mandate from the G20 leaders issued at their summit in Cannes, France last year, sets out 35 recommendations for the development and implementation of a global LEI system. The recommendations are guided by a set of high level principles which outline the aims of such a system.
The report notes there’s widespread agreement among regulators and within the financial industry on the merits of setting up a uniform global system for legal entity identification.
But public intervention may be needed to break down barriers and take the initiative forward as to date it’s been impossible to get over initial hurdles by relying purely on voluntary adoption and market incentives, the FSB says.
The principal reason why a system is not already in place is that the benefits “are collective and accrue to users and the broader public as a group.”
There are insufficiently strong incentives in private markets to overcome two sources of market failure, the FSB says. The first is a problem of collective action and coordination, reflecting the challenges of getting agreement that a particular scheme offers the best approach. The second reflects the problem of launching a network.
(A Global Legal Identifier for Financial Markets – FSB: www.financialstabilityboard.org; Making Resolution Robust – Completing the legal and institutional frameworks for effective cross-border resolution of financial institutions – IIF: www.iif.com)
David Keefe (email@example.com)