Standard legal entity identification would benefit regulators but would also assist individual financial institutions in aggregating information across multiple divisions, locations and lines of business. It would also facilitate communication across institutions (such as between asset manager and custodian, financial institution and client) regarding parties to financial transactions, exposures, and risk. For decades, financial institutions have struggled with the lack of a common standard, a Tower of Babel of multiple symbologies.

Impetus for a Standard LEI
Lack of common identification of financial intermediaries created major blind spots at the height of the global financial crisis of 2007-2009. Systemically important banks are systemically important partially because they may be "too big to fail" but primarily because they are "too interconnected to fail." The obligations, linkages, and hierarchy of financial institutions must be understood in order to properly measure and monitor risk.

In a consultation paper published in October, the Financial Stability Board established by the G-20 nations identified data gaps as contributing to five areas of risk: concentration risk, market risk, funding risk, contagion/spillover risk and sovereign risk.

Concerted action to establish an LEI standard was triggered through two separate elements of Dodd-Frank - one which gave the Commodity Futures Trading Commission rights to regulate the swaps marketplace, and one which established an Office of Financial Research chartered with gathering information to support research on systemic risk. Last November, the OFR called for the establishment of a universal legal identifier.

Progress to Date
The industry made great - in fact, remarkable - progress defining and establishing a standard LEI. The Securities Industry and Financial Markets Association and other bodies together documented industry requirements for legal entity identification, which were published in May.
Organizations to serve as the registering authority, facilities manager, and standards body were recommended in July, again with broad industry consensus. The International Standards Organization has produced a draft standard for legal entities, ISO 17442, and is targeted to publish the final standard in January 2012.

All the pieces are coming together - the need is clear, the regulatory impetus is there, the industry has consensus and the standards bodies are rapidly moving forward. Monumental progress in a year. But - there's still a critical element that remains to be addressed.

Current Focus: Global Action
One of the factors that has galvanized the industry on this issue has been the regulatory call for a standard, triggered by the Dodd-Frank tenets. Taking this in perspective, it is important to remember that Dodd-Frank is a U.S. regulation.

While the U.S. is unquestionably a dominant global financial center, the world does not revolve around the U.S. A U.S.-driven standard would become widely adopted, but adoption of a U.S.-only standard would still fall short of the vision of a true universal legal entity identifier.

Success, now, depends on cooperation with a consortium of regulators in major markets around the globe. To date, some other regulators have issued papers supporting a new LEI standard, most notably authorities in Canada and Hong Kong. And in September, at a meeting of the G-20, that body threw its support behind the LEI process. Such backing adds significant momentum on a global scale, which can trigger additional markets to converge on the same standard.

With the right regulatory support on a global scale, a truly universal standard can emerge. For all the damage the global financial crisis created, and for all the reputation loss individual institutions and the financial industry as a whole experienced as a result, we are on the cusp of an achievement which might go down in history as one of our finest moments of industry cooperation, action, and accomplishment.

Prepare now: Three actions
1. Take inventory of your data: Know where you stand by cataloging system constraints, data flows, and target a future state.
2. Insulate legacy systems with a flexible data management hub: Minimize disruption by building centralized entity cross-referencing capabilities to support enterprise reporting.
3. Leverage as an opportunity: Reshape your business strategy to unlock value with a single entity mapping for creating customer value through cross-selling and achieving true enterprise view of risk and performance.

Watch Mike Meriton's video interview where he talks about Why and Why Now for LEi here.