As we head into Sibos 2011 in Toronto, one topic already appears to loom large at SWIFT’s annual gathering of leading financial services firms and their customers from around the globe: Legal Entity Identifiers or LEIs. DTCC and SWIFT are to be applauded for their recent mandate to lead the industry’s global efforts to develop a consensus on the requirements and standards for a viable, uniform and global ID allowing for consistent identification of parties to financial transactions. With Dodd-Frank’s rule makings by the SEC and CFTC pressing the issue, there is no time to waste in creating this universal LEI standard.
The Physical Geography of Finance
However, similar to healthcare and other industries, the current approach to LEIs is trapped in what CLOUD would call a physical geography of finance. The very fact that a universal LEI standard is being built only for financial markets makes clear the narrow and limited thinking being applied to this critical counter-party problem. Legal entities are not unique to finance, so why are we building an identifier that is limited to one industry silo? Clearly, the systemic risk we are seeking to balance in the financial system does not just occur between banks. The very risks to which banks are exposed come from the credit they extend to other corporate entities, but the LEI starts at the institution level and not at the very critical data level where the patterns of risk are to be found. CLOUD’s vision for the future of the Internet will not change the short-term approaches to the LEI, however, it is useful to understand our thinking to know what will be possible in the future.
Electronic Health Records for the Health of the Financial Industry
To help frame the issue, I will lift an example from the realm of CLOUDHealth, rather than CLOUDFinance. Financial statements really aren’t too different from an electronic health record, however, instead of revealing the health of a patient, they reveal the health of a company. Electronic health records (EHRs), like financial statements, remain trapped as digital manifestations of their paper-based cousins. The longer we see the Internet as an electronic courier service of documents, the longer we will miss the systemic opportunities represented by this powerful shift in technology. As I stated in a recent opinion piece in Interactive Business Reporting magazine, “Our modern digital paper gives us the opportunity to dynamically and rapidly assemble information at its point of consumption, rather than at the point of creation.”
Focusing on the Systemic Risk Rather than the LEIs
We appear to be more focused on the creation of LEIs than we are on the problem they are intended to solve. If the problem is systemic risk, then it would appear that we need to have the ability to build a customized EHR for the health of the financial system. If we create a pull-based, dynamic and secure environment for information, then we will no longer be dependent on the current push-based approach to financial statements. We can create our own financial statements, assembling only the industry-wide information we need to discern critical patterns in the data, linking the data to the LEI if that is necessary to follow the audit trail to its necessary conclusion.
And, that is the challenge with LEIs, they will continue to depend on the company to act as the silo in which data must be held. All of our efforts with systemic and counter-party risk are on the creation end, rather than the consumption side.
To Be Continued…