Consider the humble bar code.
That scannable numeric code on the products bought and sold every day facilitates a complex global retail chain from Australia to Alabama.
The financial sector is in the market for something similar. In order to develop a consistent and complete understanding of financial exposures, market participants and regulators need a global solution: a uniform identification convention for the aptly named legal entity identifiers, or LEIs, which will make it easier to effectively monitor and manage risks.
LEIs backbone is a 20-character alphanumeric code, which is unique for each legal entity participating in financial transactions.
A common global language to identify market participants would enable firms to better monitor and understand the relationships between financial firms and their counterparties. There are a range of benefits that a global LEI standard would provide both regulators and firms. A uniform identification format would allow organizations to be identified across regions. Additionally, even if companies change names, LEIs would maintain consistency. Increasing transparency and helping firms and regulators better monitor and manage risk would benefit the financial system overall.
The Financial Stability Board, a Switzerland-based organization that seeks to coordinate the work of financial authorities at the international level, is helping drive the effort to implement LEIs globally. Of course, creating a global financial standard is a challenge, particularly when it must be coordinated among regulatory systems around the world.
Fortunately, the United States, among other countries, has taken steps to mandate the use of LEIs — a very positive development — and with 300,000 LEIs already issued, the system is covering a broad range of firms in the financial markets. After all, as financial leaders like SIFMA president and CEO Kenneth E. Bentsen, Jr. suggest, “It’s time to take this commonsense effort across the finish line.”