LeaveHQ, 22/03/2016  
 

Here we have yet another example of where the real power lies. And it isn't in the EU.

This particular example is an element of the global financial regulatory system, one which has been emerging since the global financial crisis of 2008 and which is evolving in huge leaps and bounds. 

It is called the Legal Entity Identifier (LEI) which, on the face of it, is not wildly exciting. No one will argue that it is going to set the world alight, throbbing with anticipation. 

Nevertheless, the LEI is a crucial element of the regulatory and enforcement system which seeks to control the global financial services system. It is actually a sub-system based on the ISO 17442 standard. It comprises a twenty-digit alphanumeric code and associated set of six reference data items uniquely to identify a legally distinct entity that engages in financial market activities. 

Collectively, these identifiers make up a global database which enable regulators, private sector firms, and industry associations instantly to identify anyone engaged in financial activity. 

Despite the simplicity of the concept, the ramifications make it extremely complex. Private industry has made several attempts over the past 20 years to establish a system and has failed.

Now, to implement and administer the new system, under the aegis of G-20, the Financial Stability Board (FSB) set up in January 2013 a Regulatory Oversight Committee (ROC), called the LEI ROC. It is a group of over 70 public authorities from more than 40 countries established in to coordinate and oversee a worldwide framework. 

In 2014, it created the Global Legal Entity Identifier Foundation GLEIF to act as the operational arm of the Global LEI System. GLEIF also accredits and monitors the Local Operating Units (LOUs), which are the partner organisations which actually issue the LEIs to legal entities engaging in financial transactions. 

In June 2015 the GLEIF appointed Karla McKenna as its new head of standards. 

She is a specialist in the area of financial services standards, is responsible for facilitating the development and implementation of GLEIF standards and leveraging international standards from organisations such as the International Organisation for Standardisation (ISO) to maximize data quality and the operational integrity of GLEIS. 

McKenna's background tells its own story. She is a director of Market Practice and Standards at Citi, and is a member of the Board and Executive Committee of Accredited Standards Committee X9 (ASC X9) and the Board of the International Securities Association for Institutional Trade Communication (ISITC). 

She also chairs the ISO Technical Committee 68 (ISO/TC 68), financial services, which developed the ISO 17442 standard, and the Securities Market Practice Group (SMPG). She joined the GLEIF on a secondment agreed with Citi for a one-year period with the option of extension. She reports to Stephan Wolf, the chief executive officer of GLEIF, working out of a new office in Basle in Switzerland. 

For the UK, one of the prominent LOUs is the Stock Exchange. It contributed to the development of the ISO, and is the UK's National Numbering Agency for the provision and maintenance of financial reference data. 

The crucial thing here is that, when it comes to the EU, it is a downstream organisation. The idea was endorsed by EU Internal Market Commissioner Michel Barnier in February 2011. "We must also work together in a common identification of market players", he said. "This is an area where the US is already committed, but that requires global standards".

Currently, the Commission's self-described role is to encourage "the establishment in Europe of local operating units to assign identifiers to European companies". Just days ago, the European Central Bank published its opinion on draft regulations extending the use of the identifier.

The EU is also working on the transitional stage preceding the implementation of the definitive identifier, while the Commission is considering "the possibility of preparing a legislative proposal, which would make it possible to transpose the obligation to use the LEI into the European legal framework".

What that does is confirm what we previously reported from the House of Lords which stated that in respect of "post-crisis EU financial regulatory framework", it is "likely that the UK would have implemented the vast bulk of the financial sector regulatory framework had it acted unilaterally".

Not least, said the House of Lords, this is because the UK was closely engaged in the development of the international standards from which much EU legislation derives. 

From the perspective of Brexit, this makes the point for us once again, that the process of leaving will have a largely neutral effect on financial services regulation. The EU is not the originator of the system – it is the law taker rather then the law maker. 

And that's what globalisation is all about.


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