The glittering life of GLEIF

Opinion | 21 September 2017
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Stephan Wolf, the CEO of the Global Legal Entity Identifier Foundation talks to Katharine Morton about how the LEI has already exceeded expectations, the impact on trade, and how LEIs could end up being mapped with BIC codes. A marriage made in heaven?

Why and how did the GLEIF [Global Legal Entity Identifier Foundation] come into existence?

Stephan Wolf: All of this starts with the financial crisis and the lack of transparency in the market of who does what business, with whom, who owns whom, and who owns what. One thing was clear, the regulators said the market failed to provide unique identification by itself, so the G20 asked the FSB to think about ways of how to prevent crises like this and work on issues like systemic risk. One of many action items was the creation of the LEI, the legal entity identifier, which is a unique lifelong identifier for any business. The recommendation was issued in 2012, the first codes were issued in 2013, and GLEIF came to life in 2014. We are a not-for-profit organisation - our job is to manage the network of partners, the LEI issuers that provide trusted and open data that the LEI data pool represents.

The LEI is a self-registration system, so legal entities eligible for an LEI, or those who want to have an LEI, can pick and choose among the network of issuers.

These issuers work according to the same standards that GLEIF is responsible for developing. These are technical standards, legal standards, agreements, contracts, organisational standards. Other than that, they compete among each other, on their services, price, but not on quality because that is one of those constraints that we give them. Our job is to manage this network, to have an open, reliable, trusted platform for unique entities, LEI on a global scale. It's very important to mention global as there are lots of similar business registries around the world but they are all local. In today's world when everything is cross-border, you need a global identifier to conduct business with each other across multiple jurisdictions.

Are there other problems LEIs are trying to fix?

Stephan Wolf: I tried to answer the question of what LEI was supposed to fix at the beginning, but you might not be surprised to hear this from me, it was a complete success. Look at it - we had a global credit and derivatives space which was out of control, and nobody had transparency and just three years after introducing the LEI, we have roughly 500,000 legal entities being covered on a global scale, with all participants in derivatives trade. So, we checked this box and say the tools that the GLEIF provides to the regulators to get more transparency in the derivative space, that was a huge success story. And, it's almost like a done deal because everybody takes it for granted these days.

The mission now is broader than that. It was already in the FSB recommendation that the LEI should support any financial transaction, not just derivatives trade, and we see regulators picking this up, we have the MiFID II and MiFIR [revised Markets in Financial Instruments Directive and Markets in Financial Instruments Regulation] in Europe, we have the new EU prospectus rules [(EU) 2017/1129], which covers both the issuance and the trading side of all the instruments traded in Europe by any market participant. If you're a bank in Europe, but your counterparty is in Singapore, your counterparty is also eligible for having an LEI in order to trade with you in Europe. So, the success model, if you like, of the derivative space is now going to be expanded in the whole capital and moneys market, and we predict the growth of the LEI system to cover that on the North American and European scale, predominantly, to be roughly 1.5m legal entities, and if Asia comes in, this number could even grow further. And, when you look at that as the core of the whole system, trading in the sense of financial instruments, there is no limit or boundary to extend the reach of the LEI because there are so many other areas around banks and finance that could benefit very much from it, like supply chain and trade finance.

How do you counter the criticisms, which are still there, that LEI is just another regulatory burden and another acceleration of alphabet soup of things that people need to do?

Stephan Wolf: We know about the current question about deregulation, mainly coming from the US, and it's always a good thing to look where there's something out of control or whether something is on track. We don't comment on that as it's a discussion for the regulators among themselves. But for the LEI, I'm very bullish, because the LEI is not a regulatory burden. The LEI is a tool that belongs to the legal entities that they can use and exploit to their own benefit. Our entire strategy at the moment is targeting the private sector, we're not doing any lobbying or anything like that for the LEIs. Mandating LEI use is the prerogative of the regulators. But we're now addressing the private sector and we're going to give them indications on enormous amount of savings that are possible if industry adopts the LEI for their own sake. So, it started with the regulators to get us over the hurdles, if you like, because the market failed to deliver the solution itself. But, now that we have critical mass it becomes almost imperative for the private sector to think about adopting it.

So it doesn't add to the level of intermediaries and regulators?

Stephan Wolf: No, it doesn't. GLEIF is not a regulator, it is a private foundation. The LEI issuers are also mostly private organisations. It will help the regulators, let me give you an example. The LEI is going to be used as an identifier for the unique transaction identifier, the UTI, which is going to help massively to get trade reporting easier, faster, and in the same standards. There's a multitude of applications that this supports, within the public and private sector. I mentioned risk management, compliance is a big issue, client relationship management, front office, so, no, we don't believe that GLEIF is another burden.

I guess you'd say the LEI encourages rather than inhibits trade, then?

Stephan Wolf: First of all, it enables smarter, less costly and more reliable decisions about whom you do business with. So, the LEI is not inhibiting trade, it will make it faster and easier to run your trade and to report on your trade. The only reason why someone would not like to trade anymore because there's an LEI requirement is because there is something to hide, and that's exactly what was in the interest of the transparency of the system when these kinds of things come to the surface, so no, the LEI will not hinder anybody to trade. On the contrary, we believe that trading will become easier, and more transparent, technology will be adopted to run it seamlessly across computer systems, across firms, altogether it should be easier.

How many LEIs would a group organisation need? Are you talking about per organisation, or per trade - how does it work?

Stephan Wolf: That's a very important question. In order to avoid misunderstanding, the term 'legal entity' is precisely defined by the regulatory framework. It is not just corporates, these are all the parties that legally or financially are performing financial transactions and are liable for those financial transactions. For instance, LEIs are eligible for corporates that trade, but also funds for instance, and funds are in many jurisdictions not representative legal entities, but they have their own body, so to speak, and that's why they are eligible for an LEI. The next ones that will come very shortly are international branches of banks. So when a US bank, for instance, opens up an office in Europe, they sometimes don't do this by legal entities, but simply by international branches, but they act against their own books, so that's why branches will also become eligible for LEIs. And last, but not least, there are a number of individuals acting in a business capacity. They are usually registered in business registries already, and they will also become eligible for LEI.

And, for the hierarchy, since the term is linked to legal entities that act on behalf of their own books, it is clearly understood that in the hierarchy, the organisation that owns subsidiaries, that owns another subsidiary and so on and so forth, every leaf in that tree, every child in that hierarchy that participates with international trade would be eligible for an LEI. But that leads to a very interesting discussion. We have had many large organisations tell us that rather than to go one by one through their companies and with the risk of missing one and then not being compliant, they are now starting to turn this upside down and they run this through top-down registration. So they give us their entire 'Christmas tree' as we call it, so all the entities within the group, whether they need an LEI or not, and that makes it much easier for the organisation to control the LEI, the renewal, everything else. That's a very positive new development that we'll see even more of in the next couple of years.

What about blockchain?

Stephan Wolf: ISO created a fintech advisory group and I am one of its two co-conveners. I have a thorough background in IT. I started to look into blockchain, DLT almost two years ago, and yes, we're very actively monitoring the market, we're looking into options of how the LEI system could help. At some point in time, we might even consider using DLT for ourselves. You never know.

What is your definition of success - and where next?

Stephan Wolf: The numeric criteria, like the 1.5m [LEI registrations] by 2020, are clear but when you ask me how I would measure success, it's by being recognised as being relevant by the industry. So, if you ask what is in it for me, it's if we can make the LEI a tool where people say 'I want to have it, because it helps me, it saves costs and eases operational pains,' that would be a good thing.

For example, as we're talking in the Sibos edition. There's the trading side, so everybody must have an LEI, and then you have the payment side, where all the groups work together on the SWIFT network with BIC codes. Very similar base concept for the past 40 years, but [the two sides are] completely separate. That means every firm in the world, every regulator, every supranational, everybody must create a link between the BIC and the LEI in order to recognise both and [these are pointing to] the same entity. We were thinking, how can we create relevance to the industry by taking away that burden? So, we reached out to SWIFT, and we have a verbal agreement that SWIFT and GLEIF together will create a mapping table, stable standards between the BIC code and the LEI code. Because right now, [we are] very actively in discussion with SWIFT and I'm very positive that we can give you good news soon.

Will it be a complicated mapping process?

Stephan Wolf: The beauty is that people could keep using the BIC without the need to rewrite all their software for different identifiers, yet they could benefit from the LEI system and the robust and good quality management underneath. So, it would combine the best of both worlds without the need to rewrite software, and that's going to take a lot of pain away from the industry. Everybody I've talked to so far was really excited about it.

Stephan Wolf is the CEO of the Global Legal Entity Identifier Foundation

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