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Karla McKenna, head of standards at GLEIF, provides an update on the new ways fund relationships are recorded, and the organization’s digital forays.
Karla McKenna
(FTF News recently got an update from Karla McKenna, head of standards at the Global Legal Entity Identifier Foundation (GLEIF). In particular, McKenna focused on the organization’s efforts to use LEIs to show the way relationships affecting funds are recorded in the Global LEI System (GLEIS). The goal is to show relationship data consistently throughout the GLEIS. The LEI Regulatory Oversight Committee (LEI ROC) of GLEIF consulted on the policy change. The organization has implemented three new definitions. The first is a Fund Management Entity relationship, which is “the main management entity of a fund … responsible for the constitution and operation of the fund. The “Umbrella Structures” relationship is “a legal entity with one or more than one sub-funds/compartments where each sub-fund/compartment has its own investment objectives, separate investment policies and strategies, segregation of assets, separate investors and which has segregated liability between subfunds/compartments.” The third Master-Feeder relationship involves “a Feeder Fund … invested in a single other fund … or several funds that have identical investment strategies … referred to as a Master Fund (or Master Funds).” McKenna presented an update of the fund relationship push at ISITC’s gathering in Baltimore this past September. This Q&A also covers GLEIF’s moves into the digital realm, including embedded LEIs for regulatory filings.)
Q: Have the new fund relationship types — Fund Management Entity, Umbrella Structure and Master-Feeder Relationship — been officially approved?
A: Yes, the LEI Regulatory Oversight Committee (ROC) approved the policy regarding these fund relationship types and has published the policy on its website on the 20th of May 2019.
The policy document can be found here: https://www.leiroc.org/publications/gls/roc_20190520-1.pdf
Q: Will the new relationship types be coming into effect by January 2020?
A: No, the implementation is expected by November 2020.
Q: What has GLEIF learned from the consultation process for the new fund relationship types?
A: The LEI ROC has demonstrated with the consultations with the industry that there is a need to replace the current optional reporting of a single ‘fund family’ relationship in the entity data record with distinct fund relationships which will expand the relationship types captured and published in the Global LEI System (GLEIS).
GLEIF also thinks, as is stated in the policy, that the number of relationships opt outs from fund entities will decrease with the introduction of these fund relationships providing better information regarding fund entities.
Q: As for LEIs in the digital world, how are the proof-of-concept efforts with Hyperledger Indy and Ethereum progressing?
A: The first two digital verifiable credentials proof-of-concept efforts for both the Hyperledger Indy and Ethereum blockchains have concluded.
GLEIF presented the results of these proofs-of-concept at its Forum in Washington, D.C., on October 24, 2019, which was attended by 160-plus participants mainly from U.S. regulatory, blockchain and technology, banking, academic, and not-for-profit, consulting industries, in which LEI would potentially benefit significantly.
Q: What kinds of industry participants are taking part in the proof-of-concept (POC) tests?
A: The stakeholders that GLEIF engaged within these proofs-of-concept represented the following roles in the use case tested:
- A regulator to receive a regulatory filing secured and verified by digital verifiable credentials;
- A legal entity filer or submitter of a regulatory filing with an digital verifiable credential based on its LEI;
- And an LEI Issuer to confer digital identity on the legal entity through the issuance of a digital verifiable credential, based on the legal entity’s LEI and GLEIF to accredit certain LEI issuers to be able to issue digital verifiable credentials based on LEIs in addition to usual LEI registration.
GLEIF also engaged with members of the digital identity community and frameworks based on the respective blockchains, as well as developers, to design and deliver the technical solutions for the proofs-of-concept.
Q: How will the target use case for embedded LEIs of regulatory filing with a regulator help securities firms improve their compliance?
A: The results of the POCs demonstrated that a firm submitting a regulatory filing could secure both the content of the filing as well as its interaction with the regulator secured by cryptographic means.
Legal entity filers/submitters also had control of the digital verifiable credentials that is issued to persons who were authorized to represent the legal entity officially and could retain or revoke credentials as necessary.
Regulators also were able to verify the validity of the digital verifiable credentials submitted with the filing in a decentralized manner directly with the legal entity, as well as further through the chain of trust that was created by the issuance of digital verifiable credentials based on LEIs through the LEI Issuer, GLEIF and the digital identity frameworks.
Q: If the regulatory filing use case is a success, what other opportunities does that open up for the LEI usage among financial services firms via the digital realm?
A: GLEIF sees that the use of digital verifiable credentials based on LEIs could have application far beyond the initial use cases tested.
Two use cases that directly could extend the initial regulatory filing use case would be for a legal entity to include digital verifiable credential use by third-party filers authorized to submit filings to regulators on its behalf, which is a common situation in the U.S., as well as including other stakeholders directly within the filing process, such as auditors, who could be authorized to add audit opinions, for example, to financial filings before submission to regulators.
The legal entities also saw the potential for use cases for client onboarding and the know your customer [KYC] process in which potential or existing clients could submit required documentation in digital form secured by digital verifiable credentials to financial firms.
GLEIF plans to continue to test additional use case for use of the LEI in digital verifiable credentials into 2020.
