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Thursday, 24 April 2014

DTCC/SWIFT utility for OTC derivatives a big step for LEI initiative

I wrote a blog back in March calling for Legal Entity Identifiers to be made compulsory. I confess to being a little surprised at the attention it received. Then, as now, I saw the initiative as one of those no-brainers that have no real downside. To be clear, though, I had certainly underestimated the amount of interest in the work being done around this topic, which continues.

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

Today’s launch by the DTCC and SWIFT of a CFTC Interim Compliant Identifier (CICI) Utility ( is a big step in the right direction and will end up as an important component of the new federated reporting regime for global OTC derivatives trading.

Capturing global counterparty linkages via a standardised code can only strengthen the financial system – at the regulatory end as well as at the level of individual market participants – and avoid the kind of chaos that ensued following the collapse of Lehman Brothers when liquidators almost didn’t know where to begin to unpick the firm’s convoluted trading positions.

From an operational risk management perspective, you’d have thought that banks would jump at the chance to have a better handle on concentration risk and position limits. And in fairness to the banks, the initiative seems to be progressing – to this point at any rate – with a minimum amount of dissent.

The Financial Stability Board, on behalf of the G20, had set a deadline of March 2013 to have an LEI system in place. The CFTC says the new CICI identifier must be used by registered swap dealers and major swap market participants for CDS and interest-rate swaps from October 12, the effective date for the CFTC’s final swap reporting and record-keeping rule.

To get to a globally standardised solution, DTCC, SWIFT, the Global Financial Markets Association (GFMA – the industry trade body) and other market participants are working with the FSB to get to a global LEI consensus. The plan is for the CICIs assigned by DTCC and SWIFT to become LEIs following the launch of the global FSB-endorsed system.

The new DTCC/SWIFT web portal contains the full database of all identifiers assigned to date. That amounts to around 24,000 entities from 80+ countries and the database is heavily weighted towards OTC derivatives trading counterparties. It currently accounts for around 50% of parties active in those markets. Globally, the expectation is for up to 1.5m legal entities/counterparties engaged in financial transactions to be registered across all asset classes.

As you might imagine, the GFMA was over the moon over the DTCC/SWIFT initiative and put out a call-to-arms to market participants required to obtain a CICI to register for one. The Office of Financial Research, a Dodd-Frank agency established under the auspices of the US Treasury, is also heavily involved.

To put the CFTC initiative on-side, the FSB had allowed for jurisdictions to serve as early adopters of a global LEI. In the US, the CFTC issued a rule requiring swap counterparties to be identified by a LEI by July 16 2012. Because the global system would not yet be functioning by then, the CFTC provided for an interim solution that would subsequently conform to the global standard.

Taken in parallel with the EU and global initiatives to provide a framework for non-bank resolution – ie. for central counterparties, payment and settlement systems – the moves towards LEIs provide an incredibly important industry safeguard, not to mention an incredibly powerful risk-management tool. All market participants should do everything they can to get involved. And not wait before it becomes compulsory.


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