America’s Attempted Domination Of LEI Slams into FSB Wall

15 january 2013

The American plan to develop a centralized Legal Entity Identifier and run it through the DTCC in New York ran into heated opposition at a meeting of the Financial Stability Board (FSB) in Basel in mid-October.

In the U.S., Dodd-Frank requires the the Commodity Futures Trading Commission (CFTC)  to mandate the use of an LEI in has moved ahead with its own version of the LEI — the non-intelligent 18-digit random number plus two check digits –  promoted by the DTCC, SWIFT and SIFMA — which it requires for parties to U.S. swaps transactions wherever the bank is based, raising complaints of extraterritoriality. After some criticisms, the DTCC and CFTC changed the name of their ID code from LEI to CICI for CFTC Interim Compliant Identifiers. Thee CFTC also said it would adopt the LEI standard which it is launched, now scheduled for the spring of 2013.

Even so, leading regulators from the EU, the UK, France and Japan sent a letter to CFTC  chairman Gary Gensler saying the way the CFTC has implemented CICI violates the reform plans agreed at the G20 meeting in Pittsburgh.

“Regulation across the G20 needs to be carefully implemented in a harmonised way that does not risk fragmenting vital global financial markets.” Member states of the EU and Japan are close to implementing their own rules on clearing.

“…we urge you before finalising any rules or enforcing any deadlines,to take the time to ensure that US rule-making works not just domestically but also globally.” The letter asked that US rules allow Americans to transact with non-US entities which have a similar compliance regime.

The letter was signed by Michel Barnier, the EU commissioner for internal market and services, George Osborne, the UK chancellor of the exchequer, Ikko Nakatsuka, minister of state for financial services in Japan and Pierre Moscovici, minister of finance in France.

First announced by SIFMA more than two years ago, the American LEI proposal has never enjoyed the broad support outside the U.S. that SIFMA claimed for it. Last week that became abundantly cleared as regulators from Asia, in particular, objected to having a code developed in the U.S. pushed at them. It didn’t help that the DTCC has gotten way ahead of regulators in other countries by developing the LEI code in an 18-digit random number plus two digit bank and has been sending it to various financial institutions outside the U.S, along with a bill for $200 to register it in a central database.

The American attempt to take over the standard and run it from New York has annoyed other regulators, said one participant in the discussion. Other countries blame the U.S. for destroying the global economy through its poorly regulated finance sector, and now the U.S. wants to run a registry of its design to impose its idea of a solution to reduce systemic risk.

In place of a centralized database, many countries want a federated system where the identifiers are developed by a country or region. This is especially key for countries that don’t use the Roman alphabet. How, asked Asian regulators, can a New York-based registry validate the names of banks that are in Japanese or Chinese? The issue is important to Russia, India, Saudi Arabia and Korea as well.

In a blow at the DTCC, third-party registration will be banned — no more envelopes arriving in the mail with an LEI and a bill for it. The LEI system will depend on self-identification and self-registration, said the FSB.

The random 18-digit code plus two check digits will have a four-digit prefix added and it will have intelligence in it. Regulators were concerned that an entirely random number could have duplicates in the system. American regulators have said a random code will reduce confusion caused by mergers and acquisitions.

DTCC and SWIFT must start to use the four-digit prefix if they want to migrate to the LEI system, said the FSB.

More on this in a panel on the LEI in Asia at Sibos, 9:30 a.m. Tuesday.