Following two earlier consultations in 2015, the Legal Entity Identifier Regulatory Oversight Committee (LEI ROC) has published a document setting out its latest policy design process for collecting data on direct and ultimate parents of legal entities, to be implemented within the Global Legal Entity Identifier System (GLEIS).
The report explains that a phased incremental approach is favoured as the system is still at an ‘early stage’ of development with 420,000 entities globally having acquired an LEI. The LEI ROC is aware that the preliminary phases may not meet all the needs expressed in the consultations by stakeholders and will work on expanding the scope of relationship data in future phases. But such an approach seeks a balance to avoid imposing unwarranted costs or complexities that could be detrimental to the expansion of the overall system.
Information on parent entities (level 2 data) would be part of the information that must be provided in order for an LEI to be issued or renewed. Under the proposals, entities that have or acquire an LEI would report their “ultimate accounting consolidating parent”, defined as the highest level legal entity preparing consolidated financial statements, as well as their “direct accounting consolidating parent”. In both cases, the identification of the parent would be based on the accounting definition of consolidation applying to this parent.
Accounting definitions were chosen as a starting point as the ROC concluded that their practical characteristics outweighed limitations caused by the fact that they are designed for a different purpose, i.e., to report relationships to investors on a going concern basis. These practical characteristics are that:
- They are applicable to both financial and non-financial companies.
- Their international comparability has increased, following greater convergence between the accounting standards IFRS and US GAAP on the scope of consolidation.
- They are widely used, publicly available and their implementation is periodically reviewed by external auditors.
Entities would report relationship information to their Local Operating Unit of the Global LEI System, which would verify the relationship information based on public documents if available (e.g., list of subsidiaries in audited consolidated financial statements; regulatory filings), or other sources.
The information collected would then be published in the Global LEI System and therefore freely available for public authorities and market participants, subject to a pilot phase to examine issues associated with collecting data on parents that do not have an LEI. At this stage, the GLEIS will only record relationship data that can be made public, in accordance with the applicable legal framework.
However, a number of concerns were expressed in the 2015 consultations, the main ones being:
- That there were other important relationships not captured by accounting consolidation, such as economic interdependence or funds and other vehicles managed by an entity on behalf of investors; That expanding LEI coverage was a first priority, before the collection of level 2 data, which major industry associations suggested to delay.
- The collection of level 2 data could be costly and time consuming for the Local Operating Units who collate the data, which may not all have the relevant expertise, and this could lead to an increase in fees which would slow down the overall expansion and adoption of the LEI.
- Costs for entities themselves were also mentioned.
The report concludes that the collection of relationship data will open areas that are new from a global perspective and potentially difficult to address clearly from the start. As such, there will be an ongoing need for decisions as the work progresses. Those decisions will be taken in light of their:
- Potential benefits and costs.
- Feasibility of implementation.
- Potential for unfavourably skewing incentives to participate in the GLEIS.
The report highlighted that in the public consultations “a number of responses also encouraged authorities to mandate the LEI as much as possible”. Consequently, whilst the initiative may be getting off to a slow start it is certainly a necessity for financial firms to ensure their systems can cope with storing, utilising and reporting out the dataset as wider adoption of the LEI is inevitable.
So far Over 60 public authorities from more than 40 countries that assented to the ROC Charter have committed to support the introduction of the Global LEI System for official or international identification purposes. Several authorities have mandated record keeping and regulatory reporting rules that require counter-parties to be identified by LEIs.
Throughout the development of the first phase of implementation, the ROC will work closely with the Global LEI Foundation and the process will ensure input from relevant stakeholders. As regards future phases of development, further public consultations may be required.
The LEI ROC process for collecting data on direct and ultimate parents of legal entities, 11 March 2016 is available here.
Ensuring high data quality in the Global LEI System:
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