A big theme present at a big industry data conference earlier this month was how firms were approaching the BCBS’s standards on risk data aggregation as well as the implementation of the regulatory data agenda. With the FSB and the BCBS agreeing that “higher expectations” must be met by G-SIFIs for risk data aggregation and reporting by 2016, and national regulators beginning to question firms on this in 2013, firms are now under huge pressure to provide data strategies and implementation plans and end denial about any shortcomings.
Interestingly, early results from a RegTechFS survey show that only 17% of firms agree that there is clear ownership of LEI registration within their organisations. This is surprising, as recent academic research shows that there is up to $10 billion in cost savings to be gained from the LEI.
The adoption of the LEI is thought of by many to be a great start in establishing standards for data aggregation, as standards and identifiers are mandated by the BCBS Principles. However, the adoption of the LEI seems to be entirely driven by regulatory mandates for individual lines of business, rather than as part of any strategic approach.
Case in point: trade reporting for EMIR begins in February 2014 and firms are beginning to register their entities (and their clients) for LEIs in order to meet the deadline. There seems to be little evidence that CDOs have been taking an active position on which LOUs they should be registering with, what entities should be registered, or how the LEI is being integrated into firms’ systems. With more mandated use-cases around the corner for the LEI (including the EBA’s recent consultation) there remains a lot of uncertainty on just what approach should be taken.
So why aren’t the CDOs taking more of a leadership role in getting the LEI adopted? Despite the sentiment that the LEI is ‘done’ and organisations can now get on with it, there are many sticky data challenges which require senior thought leadership, both from within and across institutions. In this sense, CDOs could usefully take the lead and galvanise managers across the front, middle and back offices – as well as clients and FMIs – to get clarify on several key issues today:
1. What are the LEI use cases? Lack of detail on use cases is still a big problem. In order to prioritise what needs to happen, when and for what purpose, clarity on individual scenarios is required. For example, will all trading entities need an LEI for reporting purposes to be issued by a local LOU? Are CRR reports going to significantly expand the number of entities needing to be registered? Will KYC onboarding systems be modified to require LEI capture and introduce new workflow to account for them lapsing? Are sub-funds, branches, market venues and trade repositories going to be assigned LEIs?
2. What is the real business case for my firm? The real cost analyses need to recognise and factor in the larger business case for better data management. Will the firm be able to use the LEI to reduce spend with external data providers? How much more or less will firms’ data infrastructures cost to support? What is the time and effort required to make the changes to every system and database that needs to carry the LEI?
3. What consequences do we face and who in my firm will suffer? Is the right to trade really dependent on both parties having an LEI? Will the regulator, TR, CCP etc. reject the report without one? The bottom line is that the consequences for NOT having an LEI by a certain date for a given use case need to be clearly articulated before the industry will take notice.
The reason that these issues exist is that, to date, the need for an LEI has been driven from a public policy perspective to address a perceived market failure. The approach was largely driven by the need to identify individual exposures in the risk space, and unravel that complex web. But out of that critical need grew a host of other possible uses and advantages to be gained from a unique entity identifier.
The thinking and sentiment are correct at a macro-level, when looked at in the rear view mirror that is. However, that perspective is a bit like having a failure of a rig that pumps out billions worth of oil a day. If that rig goes down because a widget didn’t get maintained properly, the business can suffer significant financial and reputational damage. However, if it will cost hundreds of millions to get that widget replaced, the cost of replacing it must be justified in the context of the chance that the rig will go down. If accidents due to that particular widget happen once every 1,000 years, senior management might take a view that they can spend their money on other projects this year more usefully. The point we are making is that the LEI was not the sole cause of the crisis and is not the only thing senior management have to spend money on this budget year.
The reason that it is critical to address the business questions now is that the adoption of the LEI is not a minor cost. It is also not a particularly easy task to coordinate, and involves lots of people that have other complex tasks on their ‘to do’ list. In other words, the opportunity cost of doing the LEI properly is significant. Those justifying it to senior management need to be able to do so in a way that gives an impression not only a long term view of its worth, but also of its immediate impact.
The cost of registering a single entity for an LEI is approximately €133, with additional cost associated with its maintenance. This cost quickly spirals upwards when considering that the five-year cost of registering 7,000 entities is £1.8 million. And that’s excluding the internal costs of managing such a process, which can require as much as one FTE day per LEI.
This cost, and the current lack of a convincing business case, is the reason the LEI needs an owner-advocate within the firm. And who better to take the lead on the regulatory use cases and business cases for the LEI than the CDO? For that matter, shouldn’t they be integrally involved in all the regulatory data matters? In fact, shouldn’t they be accountable to the regulator for accuracy, quality, consistency and believability of the regulatory data estate for their firm?
In some cases we are seeing the CDOs taking ownership of regulatory requirements. The BCBS risk data aggregation principles go far beyond risk in asking for a centralised architecture, unique identifiers, and a data dictionary. Out of necessity, implementation of the Principles is not something that can be handed to the risk function to go fix; it has to be handled at a higher level. Logically, it fits well with what is thought of as being a ‘good’ and proactive Chief Data Officer.
However, that being the case, there remains a lot of confusion over just what the CDO’s role is in regard to regulatory change programmes overall. Given the LEI, like the BCBS’ RDA Principles seems to be a purely data problem, it seems contradictory that its use in the regulatory reporting infrastructure as a whole is not given the same level of attention by CDOs.
The challenge of regulatory data management is only just beginning. There are over 20 critical regulatory programmes in the implementation window for 2014-15 that all need data support. Trans-atlantic examples include: the EBA’s data point model for CRD IV reporting, RRPs, EMIR, MiFID II and Solvency II; and there are of course many more initiatives to take into account globally.
It would seem that as financial services CDOs are becoming more commonplace, they are having to take on some big challenges quickly. We look at this as a positive development, as they now have a chance to prove the importance of data to the business as a whole. The question is: Do you think the widget is worth it yet?