The LEI standard could jolt client onboarding and spur new links such as GoldenSource’s LEI-ISIN connection.
The wider use of the Legal Entity Identifier (LEI) standard among global banks has the potential to save the financial services industry as much as $4 billion annually via more efficient client onboarding, according to new from McKinsey, conducted on behalf of the Global Legal Entity Identifier Foundation (GLEIF).
In line with the push to realize efficiencies via entity and financial instrument standards, enterprise data management vendor GoldenSource has just launched a data connection that supports the efforts of the Association of National Numbering Agencies (ANNA) and GLEIF to provide links between International Securities Identification Numbers (ISINs) and LEIs.
GLEIF notes that the concerns over efficiency are tied to ever-higher price tags for such operations as client onboarding, which has an estimated total industry spend “equal to U.S.$40 billion per year,” officials say. Yet, if more LEIs were being used, the productivity improvements could yield cross-sector cost reductions ranging from five percent to 10 percent annually — an estimated $2 billion to $4 billion.
“LEIs are already used in capital markets globally, where regulators have mandated their use for reporting over-the-counter derivatives transactions. The research, however, makes it clear that the ability of LEIs to simplify entity identification in the digital age has the potential to unlock substantially more quantifiable value for banks in the near to mid-term,” according to a GLEIF statement.
“To realize this value, the report recommends that banks use LEIs to support all stages of the customer management lifecycle, not just in capital markets but across all banking business lines, such as trade financing, corporate banking and payments,” according to GLEIF.
The McKinsey report underscores how the LEI could be used to improve the client life-cycle management (CLM) process.
“Currently, it is mainly used in the initial onboarding phase to comply with regulatory mandates. Yet in most cases it is obtained at the end of the onboarding phase after most steps for entity identification have already been completed,” according to the report. “If obtained and used at the beginning of the onboarding process, the LEI could expedite counterparty identification and verification, including compliance with Know Your Customer (KYC) requirements.”
After onboarding, LEIs could be useful for “periodic KYC-refresh requirements, transaction-level checks (e.g. verification for specific payments) and ongoing monitoring of counterparties’ good standing (e.g., negative news regarding a counterparty’s creditworthiness or the legitimacy of a counterparty’s business activities),” according to the report. “All of these processes would benefit from significant streamlining.”
The study also reports that wider use of LEIs could ease pain points in counterparty identification during CLM “such as the manual linkage of disparate data and the difficulty in accessing entity legal ownership structure,” according to the report. In addition, the LEI “could help mitigate compliance and credit risk, as it gives banks more holistic views of clients across internal and external data sources.”
The McKinsey research effort included interviews with industry participants and Gabriela Skouloudi, partner and co-head of Corporate and Investment Banking in the Americas, McKinsey, says the interviews uncovered four key pain points:
- Manual linking of entity data from disparate internal and external sources;
- Difficulties in assessing entities’ legal ownership structure;
- Limited transparency into entities’ key officers, such as authorized signatories;
- And poor customer experiences caused by multiple round trips to gather client data and documents.
“Compliance driven adoption in capital markets means that banks are already familiar with the LEI. Voluntary expansion of LEI usage into other business banking lines is the new frontier in progressive thinking, and can only lead to a win-win situation for both banks and their clients,” says Stephan Wolf, GLEIF CEO, in a prepared statement.
Overall, GLEIF officials want banks and other firms to voluntarily embrace LEIs and toward that end they are encouraging firms to join the GLEIF Globally Important Financial Institutions (GIFI) Relationship Group to push for the greater integration of the LEI standard into CLM processes. “GLEIF also welcomes the opportunity for dialogue with banking associations, alliances and broader stakeholders on this matter and will be pursuing collaboration initiatives on a global scale,” according to the report.
GLEIF has also taken steps to work with other organizations to further integrate the LEI into key operations:
- Early last year in February, GLEIF and SWIFT launched the first open source relationship file that matches a Business Identifier Code (BIC) assigned to an organization against its LEI;
- And, in September 2018, ANNA and GLEIF signed a new global initiative to link ISINs and LEIs “to improve transparency of exposure by linking the issuer and issuance of securities.”
GoldenSource’s New ANNA-GLEIF Link
The ANNA- GLEIF initiative is intended to increase transparency into trading exposure via a connection between the issuer and issuance of securities, which lets market participants aggregate the data required to gain clarity into their securities exposure within a given issuer and its related entities, according to GoldenSource officials.
“This means that the LEI, relating to any ISIN, can now easily be identified — removing any uncertainty as to whether the LEI relates to the correct entity within a financial institution,” GoldenSource officials add.
To support this ISIN-LEI Link, GoldenSource is launching the data connection, dubbed the “GoldenSource Connection for GLEIF/ANNA ISIN-to-LEI,” according to Volker Lainer, vice president of product management at GoldenSource.
“GoldenSource is offering this connection product to our client base under a subscription license,” Lainer tells FTF News. “The product can be deployed either standalone, or as an add-on to the GoldenSource Connection for GLEIF — Level 1 data (‘Who is Who’).”
The vendor endorsed the LEI effort “right from its beginning,” Lainer says. “We recognized its potential to help our clients to ease the pain — and depending on the circumstances even solve the big industry challenge — of establishing a reliable Entity Master.”
Lainer says that “it was a given to immediately support LEIs when data vendors started to integrate this new identifier in their feeds, even if initially relatively sparsely populated.”
Regulators then began requiring LEI usage for regulatory reporting, and “LEI coverage picked up greatly. Our investment paid off and entity data quality at GoldenSource’s clients, who by then had all the necessary LEI matching and processing infrastructure in place, showed significant benefits.”
At the same time, reference data providers were helping cross-reference “the LEI to the issued securities via their proprietary entity identifiers,” Lainer says. “However, challenges still remained, particularly where those issuer hierarchies are defined in different granularities. That can inevitably lead to some inconsistencies in the resulting Instrument — Issuer/Entity LEI correlation.”
To rectify the situation, GoldenSource officials decided to “release a corresponding out-of-the-box loader as soon as GLEIF and ANNA have made this feed available with a critical mass of ID-mappings,” Lainer says.
The new connection “can be used in various ways, for regulatory reporting and establishing a reliable Reference Master alike,” Lainer says. It can help determine the instruments via ISINs that were issued by a given entity via an LEI.
The reporting of incorrect LEIs for issuers “is now no longer acceptable from a transaction reporting perspective in this post-MiFID II era,” Lanier says. “But beyond MiFID II, more and more market participants are using the LEI as the foundation for how their entity master is established. By supporting the ANNA initiative through our new connection, firms will not only be able to validate the information they receive from their data provider, but crucially ensure that they no longer match dozens of LEIs with the wrong entity level.”
The full GLEIF report can be found here: http://bit.ly/2BXR9sg