global data standards implementation evoked in the name of better risk management but missing is the voice of the risk management community
by Allan Grody A US regulator, the Commodities Futures Trading Commission, was the first to recognize the impact of non-standard counterparty identification in financial transactions. Lehman’s bankruptcy exposed this regulator’s inability to determine the risk exposures Lehman was progressively incurring. It was an awakening by regulators across the world to the importance of legal entity identity standards in knowing what risks were building up in the 6000 entities that collectively made up Lehman. As more regulators interacted with market participants, it soon became apparent that financial data standards, more broadly, were missing. Only a global data standard’s effort could create the ability to aggregate multi-sourced, multi-identified transactions in order to provide timely regulatory transparency into risk. Errant financial transactions, each containing different identifiers and variably defined data elements, each purporting to be identical which they are not, was at the root of preventing regulators from observing risk. The US congress responded with the Dodd-Frank Financial Reform Act. At the same time as US regulators were identifying these fundamental and long festering data problems, the G-20’s Financial Stability Board was focused on reforms in the global OTC Derivative market. They came to the same conclusions as US regulators concerning the fundamental problem of data quality and lack of global data standards for counterparties and the OTC derivative products they trade in. With the G-20’s interest and the mandate to guide financial stability globally given to the FSB, we now have a set of global data standards for financial market participants and the products and contracts they trade in: the Legal Entity Identifier (LEI); the LEIs hierarchical organizational structures (intermediary and ultimate parent) for each registered LEI; the Unique Transaction Identifier (UTI); the Unique Product Identifier (UPI); the Common Data Elements (CDEs) for OTC derivatives, and the latest, the establishment of the Derivatives Service Bureau to extend the ISIN (International Securities Identification Number) financial instrument identification system from its origins in stocks and bonds to a vast array of derivatives. The consequences of the lack of universal data standards are enormous - huge additional cost and risk brought about by the need to reconcile multiple identifiers across hundreds of trading markets – equities, bonds, futures, option, foreign exchange, commodities, swaps and, most recently, crypto markets. Different identifiers are found in hundreds of payments, clearing and settlement systems; in hundreds of securities depositories; and in hundreds of financial data intermediaries operating with hundreds of data formats and identifiers. 014
Intelligent Risk - February 2021
