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Financial Stability Board Pushes Legal Entity Identifier to the G20– Vote Expected this Month – What’s Next?

Hot off the press! The Financial Stability Board (FSB) published today (June 8th, 2012) a report entitled “A Global Legal Entity Identifier for Financial Markets”  for the G20 supervisors for consideration and response to the mandate issued by the G20 at the Cannes Summit for a final vote at the end of the month in Mexico. It sets out 35 recommendations for the development and implementation of the global LEI system. These recommendations are guided by a set of “High Level Principles” which outline the objectives that a global LEI system should meet.

The proposed global Legal Entity Identifier (LEI) is expected to help regulators identify unique counterparties across the financial system and monitor the impact of risky counterparties holding positions with the banks. Assuming LEI is approved by the G20 this month, it will be the first of these infrastructure standards to be implemented globally requiring firms to integrate, reconcile and cross-reference the new LEI with existing counterparty identifiers and information, as well as manage accurate and current legal hierarchies.  

Unfortunately, manual methods, lack of data governance standards and fragile integration and data management technology has resulted in significant gaps in the quality, consistency and accessibility of counterparty information.  A recent survey conducted during a March 1, 2012 webinar on Counterparty Risk Management revealed that 47% of those surveyed said that poor data quality was the main reason for incorrect counterparty risk assessments and 79% believed that over 70% of their counterparty data was suspect. In a May 2012 Paul Rowady, Senior Analyst from the Tabb Group revealed in the “Reference Data Management:  Unlocking Operational Efficiencies” whitepaper that over 80% of those surveyed were dissatisfied with their existing reference data management systems.

No one can argue the benefits of having the right counterparty data however does it take regulatory mandates to push the industry? According to an April 2012 “Legal Entity Identifier” report from Inside Reference Data, “The need to improve counterparty data levels is a must as 50-60% of data managers in the financial services industry stated they would implement LEI’s even without the regulatory requirement.”

Regardless if LEI becomes a mandate, managing counterparty reference data effectively depends on having the right technology to integrate, reconcile and cross reference between legal entities and securities instruments, and share that data across the various risk and compliance systems in the firm. Managing only counterparty information however is not enough. In the Tabb Group report, 69% of firms surveyed require the ability to link and identify counterparties of a particular securities instrument in one system rather than managing it across siloed applications and databases. Managing reference data is cumbersome and fraught with errors without the proper governance processes and frameworks, people and capable technology. Tabb Group reported that 71% of those surveyed are upgrading their existing reference data systems in the next 12-18 months.

To learn more about the findings from the May 2012 Tabb Group Report on reference data challenges, register for the Wall Street Technology webcast titled “Reference Data Management – Reduce costs and ensure compliance with next generation technology” on June 12th, 2012 @ 2pm U.S./Eastern.  To learn more about Informatica’s Reference Data Management Solutions for Counterparty/Legal Entity and Securities Instrument Data,  watch this video clip of our solution.

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