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EU Referendum: they've got your number

2016-03-22 07:00:13

The City, we are told, is "strongly supportive of the EU single market", access to which is an important source of the City's success as a global financial hub. But, we are also informed, the City "is deeply concerned about the regulatory implications of banking union and Eurozone caucusing".

While the little Europeans thus obsess, they do so mostly from a platform of sublime ignorance, where they know little enough of the regulatory system in the UK and even less about what happens once you leave these shores. For a "global" industry, financial services is surprisingly parochial and limited in its vision.

For the main part, though, financial regulation is increasingly made at a global level, and almost to an astonishing level. And here, in this post, we look at another example of where power and influence power lies. And it isn't in the EU.

This particular example is an element of the global financial regulatory system, one which has been emerging since the global financial crisis of 2008 and which is evolving in huge leaps and bounds. It is called the Legal Entity Identifier (LEI) which, on the face of it, is not wildly exciting. No one will argue that it is going to set the world alight, throbbing with anticipation.

Nevertheless, the LEI is a crucial element of the regulatory and enforcement system which seeks to control the global financial services system. It is actually a sub-system based on the ISO 17442 standard. It comprises a twenty-digit alphanumeric code and associated set of six reference data items uniquely to identify a legally distinct entity that engages in financial market activities.

Collectively, these identifiers make up a global database which enable regulators, private sector firms, and industry associations instantly to identify anyone engaged in any regulated financial activity.

Despite the simplicity of the concept, the ramifications make it extremely complex to achieve in practice. Private industry has made several attempts over the past 20 years to establish a system and has failed.

Now it is going ahead and, to implement and administer the new system, under the aegis of G-20, the Financial Stability Board (FSB) set up in January 2013 a Regulatory Oversight Committee (ROC), called the LEI ROC. It is a group of over 70 public authorities from more than 40 countries established in to coordinate and oversee a worldwide framework.

In 2014, it established the Global Legal Entity Identifier Foundation GLEIF to act as the operational arm of the Global LEI System. GLEIF also accredits and monitors the Local Operating Units (LOUs). These are the partner organisations which actually issue the LEIs to legal entities engaging in financial transactions.

In June 2015 the GLEIF appointed Karla McKenna as its new head of standards. She is a specialist in the area of financial services standards, is responsible for facilitating the development and implementation of GLEIF standards and leveraging international standards from organisations such as the International Organisation for Standardisation (ISO) to maximize data quality and the operational integrity of GLEIS.

McKenna's background tells its own story. She is a director of Market Practice and Standards at Citi, and is a member of the Board and Executive Committee of the obscure Accredited Standards Committee X9 (ASC X9). She is also on the Board of the International Securities Association for Institutional Trade Communication (ISITC).

As a pointer to her new post, she chairs the ISO Technical Committee 68 (ISO/TC 68), financial services, which developed the ISO 17442 standard, and the Securities Market Practice Group (SMPG). She joined the GLEIF on a secondment agreed with Citi for a one-year period with the option of extension. She reports to Stephan Wolf, the chief executive officer of GLEIF, working out of a new office in Basel in Switzerland.

For the UK, one of the prominent LOUs is the Stock Exchange. It contributed to the development of the ISO, and is the UK's National Numbering Agency for the provision and maintenance of financial reference data. The Stock Exchange and other LOUs are going to have their work cut out, as what is described as the "painful reality" of rolling out such an identification system is becoming increasingly apparent.

By the end of 2014, LEIROC reported, more than 330,000 companies from 189 countries had registered for LEIs, at a one-off fee of $200 and then annual renewal for $100. Yet not all is going smoothly. 

A recent study reveals considerable concerns over the functioning of the system, while up to a fifth of registered companies have failed to renew. Meanwhile, only 18 percent of the 67,000 entities deemed "active" on financial markets have registered an LEI. There is, says an industry commentator, "clearly an adoption and ongoing governance issue".

From the EU referendum perspective, the crucial thing is that, when it comes to the implementing the system, the EU is a downstream organisation. It was not even on the ground floor. US interests as early as 2009 were pushing for the system but the idea wasn't endorsed by EU Internal Market Commissioner Michel Barnier until February 2011. "We must also work together in a common identification of market players", he then said. "This is an area where the US is already committed, but that requires global standards".

Currently, the Commission's self-ordained role is to encourage "the establishment in Europe of local operating units to assign identifiers to European companies". Just days ago, the European Central Bank published its opinion on draft regulations extending the use of the identifier.

The EU is also working on the transitional stage preceding the implementation of the definitive identifier, while the Commission is considering "the possibility of preparing a legislative proposal, which would make it possible to transpose the obligation to use the LEI into the European legal framework".

What that does is confirm what we previously reported from a House of Lords committee. It stated, in respect of "post-crisis EU financial regulatory framework", that it is "likely that the UK would have implemented the vast bulk of the financial sector regulatory framework had it acted unilaterally".

Not least, said the House of Lords, this is because the UK was closely engaged in the development of the international standards from which much EU legislation derives. And, of course, that is just as true here. The GLEIF is a spin-off from the FSB, chaired by Governor of the Bank of England, Mark Carney.

This makes the point for us once again that the process of leaving will have a largely neutral effect on financial services regulation. The EU is not the originator of the system or the regulation. It is the law taker rather then the law maker. For the UK, outside the EU would make little difference, We would continue to shape and then adopt international regulation.

And that's what globalisation is all about.