Global regulators generally agree that the standard Legal Entity Identifier (LEI), proposed in the US as part of Dodd-Frank, will improve the transparency and consistency of identifying trading counterparties. Whilst financial institutions remain skeptical about how LEIs will be established for a given counterparty and are unlikely to be eager to spend money on regulatory-driven change, there will be opportunities for them to gain some benefit from LEI adoption.
Implications of the LEI
Given the growing complexity of client relationships, the LEI can enable financial institutions to better manage risk, understand profitability and improve cross selling. There are a few things that financial institutions should consider as the industry moves toward adopting the LEI:
- Data quality. Financial services organizations that store client data in multiple databases across different departments often struggle to reconcile client and legal entity data, which can result in duplicate entries and out-of-date information. Financial institutions need clean, accurate and current data to be able to establish a client’s true profitability, effectively manage risk, and set pricing and segmentation strategies accurately.
- Regulatory requirements. New regulatory requirements mean that financial institutions must have an accurate understanding of counterparty exposures. Within Europe, the European Market Infrastructure Regulation (EMIR) covers OTC derivatives, central counterparties and trade repositories. Similarly, new US tax laws will require financial institutions to rigorously classify their clients, or face penalties.
- Client onboarding. Establishing the LEI up front will enable financial institutions to leverage external data for KYC, link to ratings data for credit risk assessment and establish core data required by operations to use the LEI in confirming and settling trades. It will also feed into consistency of identification on a counterparty for risk management and finance reporting.
Opportunities created by the LEI
Accenture believes that the LEI can create opportunities for financial institutions that are prepared to meet the challenge. For example, firms with better client data management capabilities will experience lower implementation costs—and will have a better understanding of client exposure and any actions needed to neutralize unexpected exposures. We believe that firms that can prepare for these exposures in advance will have a competitive advantage over those firms that cannot.
To learn more, download Moving to the Standard Legal Entity Identifier: Client Data Management (pdf; opens in a new window).