(This interview appeared in SAFE Newsletter Q2 2017)

Wolfgang König is Professor of Information Systems at Goethe University Frankfurt, Managing Director of the House of Finance and Member of the Board of Directors of the Global Legal Entity Identifier Foundation (GLEIF). In this interview, he reflects on the current status, challenges and next steps with respect to the introduction of Legal Entity Identifiers (LEIs) for every single institution active on the global financial markets.
 

As a result of the recent financial crisis, the Financial Stability Board suggested introducing an information system that allows for the unique identification of every legal entity participating in financial markets. The objective of this system of “Legal Entity Identifiers” (LEIs) is to enhance transparency in the global marketplace. Has this goal already been achieved?

After substantial preparations, the Global Legal Entity Identifier Foundation (GLEIF) was founded in June 2014. It acts under the supervision of 70 global regulatory bodies – in Germany, for instance, it is supervised by the Deutsche Bundesbank and the Federal Financial Supervisory Authority (BaFin). GLEIF manages a network of LEI issuing organizations to provide trusted services and open, reliable data for unique legal entity identification worldwide. LEI issuers supply registration, renewal and other services. As the primary interface for legal entities, they issue a world-wide unique identifier, the LEI, in the form of a 20-digit alphanumeric code, upon request. So the system is organized in a federative architecture: GLEIF provides world-wide standards, for instance on data exchange and quality checks, which are then executed by the LEI issuers. GLEIF also oversees the work of the issuing bodies which involves not just the technical issuance of an LEI but also – based on the specific local knowledge – the evaluation of the information that comes associated with the LEI, such as the official name of the entity, the official address and so on.

Right now we have around 500,000 LEIs in operation. This ensures that the source and destination of a financial transaction are uniquely identified – which provides a tremendous increase in transparency in the global market place. So, in a nutshell: We have already achieved a great deal. However, of course, there still remains a lot to be done.

How do you assure data quality?

The LEI connects to key reference information that allows for clear and unique identification of legal entities participating in financial transactions. The LEI issuing organization verifies the reference data supplied by the registering legal entity by consulting local authoritative sources, such as a national Business Register. Data quality is also ensured via the annual LEI renewal process.

In order to monitor and ensure high LEI data quality, GLEIF has defined a set of measurable quality criteria using standards developed by the International Organization for Standardization (ISO). These include criteria such as the completeness, comprehensiveness and integrity of the LEI data records.  GLEIF publishes monthly reports which demonstrate, respectively, the level of data quality achieved in the Global LEI System as well as by the individual LEI issuers. Moreover, we employ complex algorithms to ensure that each legal entity obtains only one LEI.

With respect to the current challenges facing financial institutions with regard to improving their digital infrastructure: Is the LEI introduction and expansion regarded as a further complexity for these digitalization projects?

Regulatory bodies – in particular in Europe – request this transparency. The industry, however, sends mixed signals. Of course, it is well known that financial institutions, and European banks in particular, are currently facing substantial challenges, such as increased regulatory demands and close-to-zero interest rates. So a lot of banks sigh in the face of the request to introduce the LEI right now which, for example, means changing fundamental software infrastructures in their institutions. However, there is also no doubt that a lot of banks need to update and modernize their systems. There are strong indications that quite a number of larger banks run a multitude of identification systems for each domain – e.g. institutional customers – in parallel, interconnecting these by individual software bridges that have to be maintained in a rather resource intensive manner. Given that these processes have to be done x-fold in parallel in each bank, there are substantial efficiency gains to be unearthed. Therefore, the LEI introduction should not only be seen as a further obstacle or complexity in this sense. Quite the contrary: A lot of banks realize increasingly that employing the LEI really helps them to efficiently fulfill important regulatory requests – for instance with respect to anti-money laundering or anti-terrorist financing – and, in parallel, also to streamline their IT systems. So one can rather argue that it is exactly the right time to introduce the LEI system as most of the institutions are overhauling their digital infrastructure anyway.

What are the next steps?

We have to fine-tune the system – for example to deal with the unsatisfactory renewal rate of LEIs in selected LEI issuing organizations. Looking onwards, on 1 May, we began raising level 2 data, hierarchical data in the sense of “who owns whom”: We collect the immediate and – looking upwards the institutional hierarchy – the ultimate parent of each registered legal entity. The implementation of level 2 data will add substantial challenges but also beneficial potential to the system. As we expect our LEI “owners” to renew their data yearly, we foresee that the level 2 data will be populated in May 2018. But given that, for example, not all parents have an LEI yet, it will take longer to reach a sufficient coverage.

Beyond that, we are currently deliberating on how different use cases can further increase the benefits of the LEI system. One strategic option is to appropriately combine the LEI with digital signatures (for example of institutions).