What’s Taking So Long to Adopt This Crisis-Preventing Data Standard?
By John Heltman
Of all the lessons learned in the financial crisis, perhaps the most fundamental was that neither financial companies nor their regulators knew how exposed the system was to toxic assets, and there was no way to find out. In part to address that failure, the Dodd-Frank Act created the Office of Financial Research and gave it power to set standards and collect data from market participants to get a better handle on interconnections between firms. The data agency has helped to push the Legal Entity Identifier, now the benchmark standard for financial standards, in an attempt to identify and differentiate between companies and their sometimes confusing web of affiliates. While the LEI was widely viewed as a positive by the industry and regulators, its adoption in the U.S. has been slow and behind the pace set by European countries. To date it is still not even universally recognized by U.S. or foreign regulators. One reason is that despite its importance and its potential for spotting danger areas ahead of a new crisis, the issue has never been a top priority for banks or policymakers. “I liken it to working on the plumbing — this is an infrastructure issue,” said Matthew Reed, the chief counsel of the OFR and the chairman of the LEI Regulatory Oversight Committee. “This is not always at the front of the agenda when you’ve got … a mandate you’re trying to satisfy. Getting this higher up in the agenda has been a challenge.” One reason for that is it has proven expensive and time consuming for firms to embrace the LEI. “I suspect it’s because the overall profound operational burden that is on every one, the banks and the regulators,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics. “It’s a lower-priority operational agreement for everybody, and it’s taking up a lot of time.” Still, the need to easily identify financial entities is clear — knowing with whom one is doing business is the cornerstone of finance and commerce. For centuries those relationships were personal and institutional, but as markets have become more global and more interconnected, the lines between one business and another have blurred. Mergers and acquisitions, as well as the prevalence of interstate and international transactions make the need for a numeric identification apparent.