[Federal Register Volume 75, Number 229 (Tuesday, November 30, 2010)]
[Notices]
[Pages 74146-74148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30018]
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DEPARTMENT OF THE TREASURY
Office of Financial Research; Statement on Legal Entity
Identification for Financial Contracts
AGENCY: Office of Financial Research, Treasury.
ACTION: Statement of policy with request for comment.
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SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the ``DFA''), Public Law 111-203, establishes the Office of Financial
Research (the ``Office'') and provides it with the authority to collect
data to support the Financial Stability Oversight Council (the
``Council'') and to set standards for reporting such data. To support
the Council in identifying connections among market participants and
monitoring systemic risk, the Office intends to standardize how parties
to financial contracts are identified in the data it collects on behalf
of the Council. The Office is issuing a statement of policy regarding
its preference to adopt through rulemaking a universal standard for
identifying parties to financial contracts that is established and
implemented by private industry and other relevant stakeholders through
a consensus process. The statement of policy provides guidance on how
the Office will evaluate whether a standard is adequate for adoption,
including its attributes and method of implementation. The Office seeks
comment on this statement of policy, including but not limited to the
desired characteristics for a Legal Entity Identifier (``LEI'') and the
institutional arrangements for issuing and maintaining identifiers and
associated reference data.
DATES: Comments must be received by January 31, 2011.
ADDRESSES: Interested persons are invited to submit comments regarding
this Statement according to the instructions for ``Electronic
Submission of Comments'' below. All submissions must refer to the
document title. The Office encourages the early submission of comments.
Electronic Submission of Comments. Interested persons must submit
comments electronically through the Federal eRulemaking Portal at
http://www.regulations.gov. Electronic submission of comments allows
the commenter maximum time to prepare and submit a comment, ensures
timely receipt, and enables the Office to make them available to the
public. Comments submitted electronically through the http://www.regulations.gov Web site can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
To receive consideration as public comments, comments must be
submitted through the method specified above. All submissions must
refer to the title of the Statement.
Public Inspection of Public Comments. All properly submitted
comments will be available for inspection and downloading at http://www.regulations.gov.
Additional Instructions. In general, comments received, including
attachments and other supporting materials, are part of the public
record and are made available to the public. Do not submit any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
FOR FURTHER INFORMATION CONTACT: For further information regarding this
Statement contact the Office of Domestic Finance, Treasury, at (202)
622-1766. All responses to this Statement should be submitted via
http://www.regulations.gov to ensure consideration.
SUPPLEMENTARY INFORMATION:
I. Background
A. The Office of Financial Research
Section 152 of the DFA established the Office within the Department
of the Treasury. Among other things, section 153(a) of the DFA
authorizes the Office to collect data to support the Council's duties,
to provide such data to the Council and member agencies, and to
standardize the types and formats of such data. Section 153(a) also
provides that the Office should assist member agencies in determining
the types and formats of data authorized by the DFA to be collected by
member agencies. Section 154(b)(2)(A) requires the Office to prepare
and publish a financial company reference database, a financial
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instrument reference database, and formats and standards for data
reported to the Office. Section 151(6)(B) provides that those data
include information that identifies counterparties.
B. The Need for a Universal Standard for Identifying Parties to
Financial Contracts
Precise and accurate identification of legal entities engaged in
financial transactions is important to private markets and government
regulation. In the private sector, data identifying counterparties
support communication between systems, facilitate transaction
processing, and allow for accurate aggregation of positions vis-
[agrave]-vis individual or classes of counterparties, which is
necessary for effective risk management and calculation of margin.
Sales, compliance, and due diligence functions also rely on unique
identification of counterparties. In the public sphere, correctly
identifying parties to financial contracts is critical to assessing the
connections among financial firms and to monitoring systemic risk.
There is currently no universal system for identifying the legal
entities that participate in financial markets. In the absence of such
a system, private firms and regulators have created a variety of
identifiers. This creates inefficiencies for firms and presents
obstacles to regulators and policymakers.
At private firms, because there is no industry-wide legal entity
identification standard, tracking counterparties and calculating
exposures across multiple data systems is complicated, expensive, and
can result in costly errors. For example, maintaining internal
identifier databases and reconciling entity identification with
counterparties is expensive for both large firms and small firms.
Complete automation of back-office activities remains elusive, in part
because of the lack of a universal identifier for legal entities. In
the worst case scenario, transactions are broken or fail to settle
because counterparties have not been properly identified.
The lack of a universal identification standard also poses problems
for regulators and policymakers. For example, precise identification of
financial firms is necessary to evaluate whether a firm poses a
systemic risk, which involves the assessments of the relationships
among firms operating across a range of markets. Indeed, the problems
that firms face in aggregating exposure are magnified in measuring risk
across the system. In addition, securities regulators must often
identify parents and affiliates of broker-dealers manually and by name.
Multiple and generally different identifiers for participants in
securities trading make it difficult to create a consolidated order
audit trail.
The financial crisis has focused both industry and regulators on
this issue. The DFA created the Office, in part, to support the Council
and its member agencies in addressing such data standardization issues.
Sections 153 and 154 of the DFA require the Office to standardize the
types and formats of data reported to and collected by the Office on
behalf of the Council, and to prepare and publish formats and standards
for that data. Section 151(6)(B) provides that those data include
information that identifies counterparties.
In addition, section 154(b)(2) of the DFA requires the Office to
prepare and publish a financial company reference database. Reference
data for a legal entity could include its name, country of
incorporation or principal place of business, and legal relationship to
other entities. Identification of the legal entity is a fundamental
ingredient in creating a reference database of financial companies.
Finally, the DFA requires the CFTC and SEC to put in place
requirements for reporting swaps and security-based swaps,
respectively, to data repositories by July 15, 2011. Public Law 111-
203, Sec. 727-728. These agencies are working to develop standards for
this reporting, including requirements for these data repositories to
have unique and consistent identifiers for counterparties and reference
entities.\1\ The Office is coordinating with the CFTC and the SEC in
these data standardization efforts.
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\1\ See: http://www.cftc.gov/ucm/groups/public/@otherif/documents/ifdocs/federalregister112210.pdf; and http://sec.gov/rules/proposed/2010/34-63446.pdf.
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II. Statement of Policy
In support of the Council's duties to identify and assess risks and
potential threats to the stability of the U.S. financial system, the
Office, in consultation with the Chairperson of the Council, intends to
establish requirements for reporting data on financial contracts to the
Office that include a standardized way of identifying counterparties.
In establishing such rules the Office would prefer to adopt a universal
standard developed and implemented by the financial industry and other
relevant stakeholders through a consensus process. In addition, the
Office believes that participation of international standard setting
bodies would be beneficial in developing a standard that can be used
widely.
If a LEI is established to the satisfaction the Office by July 15,
2011, the Office, in consultation with the Chairperson of the Council,
plans to issue a regulation mandating the use of such a standard for
data reported to the Office.
In making this determination the Office will consider the following
aspects of LEI systems:
The characteristics of the LEI, including the process of
developing and maintaining standards for the LEI;
The institutional arrangements for issuing LEIs to
specific legal entities; and
The institutional arrangements for developing,
maintaining, and publishing related reference data.
A. Characteristics of the LEI, Including the Process of Developing and
Maintaining Standards for the LEI
A LEI acceptable for use with data reported to the Office should:
(1) Be based on a standard developed and maintained via an
international ``voluntary consensus standards body,'' as defined in
Office of Management and Budget (``OMB'') Circular No. A-119 Revised,
such as the International Organization for Standardization (``ISO'');
(2) Be unique for each legally distinct entity, where each legal
entity is assigned only one LEI which cannot be reassigned;
(3) Persist over the life of an entity regardless of corporate
actions or other business or structural changes;
(4) Include minimal information about the entity in the identifier
itself; \2\
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\2\ The identifier itself should not incorporate substantial
information about the entity, such as name or principal place of
business. Although such reference data may be useful, they are
subject to change. Defining an identifier to include such
information could threaten its persistence.
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(5) Accommodate growth in the number of legal entities that need to
be identified in the full range of reporting systems and to potential
industry and regulatory innovations;
(6) Be available for all eligible markets participants, including
but not limited to all financial intermediaries, all companies that
issue stock or debt listed on an exchange, all companies that trade
stock or debt, infrastructure providers, all entities subject to
financial regulation, and firms affiliated with such entities;
(7) Not be contractually restricted in use;
(8) Where possible, be compatible with existing systems, work
across various platforms, and not conflict with
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other numbering or identification schemes;
(9) Be readily accessible using secure and open standards;
(10) Be reliable and secure against corruption or misuse; and
(11) Be capable of becoming the single international standard for
unique identification of legal entities in the financial sector.
B. Institutional Arrangements for Issuing LEIs
A LEI acceptable for use with data reported to the Office should be
issued by an entity with expertise in implementing standards for the
financial sector.
The entity should be organized and operated as a not-for-profit
body and have a formally documented governance structure with balanced
representation for relevant stakeholders. It should be subject to
supervision and regulation. The entity should also have a strong ethics
policy, addressing in part potential conflicts of interest.
Issuance of LEIs must be timely and non-discriminatory. The process
of issuing new LEIs must not materially hinder the normal course of an
entity's business.
All of the entity's processes must be adequately governed and
auditable. Access to the master identifier list and the issuance
process for new identifiers must be made available at all times.
The security and reliability of all IT systems involved in
identifier issuance and database maintenance and publication must meet
or exceed industry standards for a real-time, high-availability market
service.
Identifiers must be available to the public without fees for
storage, access, cross-referencing, or redistribution. However,
consistent with OMB Circular No. A-119 Revised, the cost of issuing
identifiers and maintaining their reliability may be recovered through
other fees, as long as they are reasonable and they are not imposed on
end-users.
C. Institutional Arrangements for Developing, Maintaining, and
Publishing LEI Reference Data
A LEI acceptable for use with data reported to the Office should
have a closely associated process for developing, maintaining and
publishing related reference data for each LEI issued.
The scope of the reference data provided for each LEI issued should
be sufficient to verify that users have correctly identified an entity
and should include at a minimum the following information for each
identifier:
(1) Name;
(2) Location;
(3) Electronic address; and
(4) Legal status.
The entity responsible for producing and publishing the LEI
reference data should have expertise in this area. It must be operated
on a not-for-profit basis and have a formally documented governance
structure with balanced representation for relevant stakeholders. It
should also be subject to supervision and regulation.
The entity must have a robust quality assurance process. Updates to
the LEI reference data should be accomplished with minimal lag time and
market participants and regulators should be able to challenge entries
and request amendments. The quality assurance process should seek to
ensure that duplicate identification numbers are not erroneously
assigned. The quality assurance process should also include checks for
existing entities including name searches, address searches, and
combinations of text strings and other characteristics.
The entity's processes should be adequately governed and auditable.
The security and reliability of all IT systems involved in developing,
maintaining, and publishing LEI reference data should meet or exceed
industry standards for a real-time, high availability market service.
Reference data must be available to the public without fees for
storage, access, cross-referencing, or redistribution. However,
consistent with OMB Circular No. A-119 Revised, the cost of developing,
maintaining, and publishing LEI reference data may be recovered through
other fees, as long as they are reasonable and they are not imposed on
those who use the reference data.
In addition, if a robust universal LEI is designated by the Office,
under the principles outlined above for the purpose of reporting data
to the Office, it is the expectation of the Office that such a LEI
system, including the relevant reference data, would be the foundation
for the financial company reference database that the Office would
publish under the DFA section 154(b)(2)(A)(i).
D. Next Steps
In the event that a universal LEI is established to the
satisfaction of the Office by July 15, 2011, the Office, in
consultation with the Chairperson of the Council, plans to issue a
regulation mandating the use of such a standard for data reported to
the Office. Further, the Office will publish in the Federal Register,
no later than 60 days prior to the earlier of the implementation dates
established by the CFTC and SEC for their new reporting
requirements,\3\ the name of the identification system approved by the
Office, the name and contact information of the entity through which
counterparties can obtain LEIs provided through the approved
identification system, and information concerning the procedure and
requirements for obtaining such a LEI.
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\3\ See: http://www.cftc.gov/stellent/groups/public/@otherif/documents/ifdocs/federalregister112210.pdf; and http://sec.gov/rules/proposed/2010/34-63446.pdf.
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The Office invites comments on all aspects of this statement of
policy, including but not limited to the desired characteristics for
LEI and the institutional arrangements for issuing and maintaining
identifiers and associated reference data.
Dated: November 23, 2010.
Lewis Alexander,
Counselor to the Secretary.
[FR Doc. 2010-30018 Filed 11-29-10; 8:45 am]
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