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ESMA gets behind LEI: But non-endorsed LOUs left out in the cold

Earlier this week, ESMA published an update of its Questions and Answers (Q&A) clarifying the use of Legal Entity Identifiers (LEI) for the purpose of OTC trade reporting to trade repositories. The Q&A finally provides for cross-border mutual acceptance by stating that only pre-LEIs endorsed by the ROC are eligible to be used for EMIR reporting.  While definitely good news, in that it marks the end of the political deadlock, this update introduces problems of its own.

For one, there are currently only three endorsed pre-LOUs. While there are several more on the path to endorsement (with different dates for each), this has understandably increased the anxiety levels of all those firms who have registered their entities with non-endorsed pre-LOUs. If a firm’s entities are all registered with perfectly respectable institutions, such as the London Stock Exchange’s utility or the Irish Central Bank, they won’t be able to use them for EMIR. As a consequence, there is a lot of uncertainty over what pre-LEIs will be compliant to meet CRD IV’s and EMIR’s January and February 2014 reporting deadlines.

Problem two is that, this being the case, there is now an even shorter lead time to acquire, validate and distribute pre-LEIs before the requirement kicks in to report them. There is a considerable amount of internal resource required to register clients for LEIs, which involves outreach to see who needs one, and the gathering of ‘express permissions’ for their registration. This is easier said than done, and many are playing the waiting game to save cost, hoping their clients will be registered by other banks first.

The incentive not to be the first mover is great: there is a considerable bill associated with just registering LEIs. JWG have calculated the average price across existing pre-LOUs for registering an entity for an LEI to be €150, with additional cost (approximately 50%) associated with its maintenance. A quick calculation says the 5 year cost of registering 7,000 entities in France will have a cost of €3.1 million. This is not a small sum, particularly for reference data. Finding the accountability and budget internally to justify such high costs is not a small challenge. In particular, many are struggling to find a true ‘owner’ of LEI maintenance, updates and year-on-year cost within the bank.

There is still a lot of uncertainty over which entities can and should be registered for an LEI. As the ROC has yet to set any final standards, many open questions remain for the registration of certain entities such as funds or branches. Example problems, such as whether sub-funds should be registered in addition or instead of umbrella funds, are adding additional complexity to an already complex implementation. Slight differences in reference data between pre-LEIs also threaten to contribute to data quality issues when porting LEIs between LOUs.

As a result, firms are having to make judgement calls on where to register, which entities, and for what purpose. These calls will, at the end of the day affect the quality of regulatory reporting and the acceptance of the LEI in Europe.

Many are looking to supplement the somewhat sparse data included in the pre-LEIs. Additional data that could complement LEIs, such as industry classification codes, EMIR classifications and risk hierarchies are on many firms’ wish lists, and a market-led solution that could fill these types of gaps effectively could be very useful. However, general consensus seems to be that there won’t be any utilities of this type operational in time to meet the most pressing regulatory requirements.

In the final stages of EMIR’s implementation, the COU is desperately needed to set concrete standards and avoid the potential downward spiral of uncertainty and cost. Just as important, however, is the need for strong leadership amongst the tier 1 institutions where the regulatory requirements present an opportunity to push for LEI registrations. First and foremost, all eyes are on Europe for this at the moment.