Tuesday, November 25, 2014

LEIs Are Key to Enhanced Transparency Says OFR Chief Counsel

The widespread use of legal entity identifiers (LEIs) can enhance transparency in the financial industry, said Matthew Reed, Chief Counsel in the Office of Financial Research (OFR). In remarks at the CUSIP annual summit in NYC, he noted that LEIs will ultimately help answer three basic questions: Who is who?; Who owns who?; and Who owns what? With more timely answers to these three basic questions, he reasoned, the OFR can better understand threats that could prevent the industry from delivering its core services to the economy.

OFR Director Richard Berner has described LEIs as a bar code for precisely identifying parties in financial transactions. The LEI is also an essential element in the standards tool kit. FSOC wants an evaluation of LEIs and, where appropriate, the promotion of their use. To that end, FSOC set up an LEI Working Group, chaired by the OFR to identify where use of the LEI would provide the “most bang for the buck.”

Transparency is no small matter, noted Chief Counsel Reed, it undergirds confidence that the financial services industry can deliver its core services. The word ``transparency” appears at least 80 times in the Dodd-Frank Act, observed the Chief Counsel, which says one of OFR’s responsibilities is to provide certain data to financial industry participants and to the public to increase market transparency. At its heart, he reasoned, transparency is about access to information. Information reduces uncertainty and fosters clarity. If whatever you’re calling information doesn’t foster clarity, it’s just noise.

A market regulator wants transparency into whether markets are functioning as intended. A prudential supervisor wants to examine the safety and soundness of a bank. The OFR wants insight into risks and how they propagate throughout the financial system. The financial services industry also needs transparency regarding, among other things, the health of a counterparty, or the return on an investment. All of these insights give confidence that the markets are working as intended, and that the federal government has the ability to monitor the health of the system and act if necessary.

But transparency is impossible if the information being provided is impenetrable. It gets garbled and becomes noise. Regulators and supervisors can make good decisions only if they have access to good information at decision time.

The Chief Counsel pointed out that the benefits of simply using the LEI for reporting can be manifold, especially if used broadly, rather than just to comply with a particular rule. For example, it might not make much sense for a medium-sized company to obtain an LEI only for the purpose of filing an annual report to its regulator. But if an LEI can be used to support multiple reporting requirements, it can help reduce reporting burdens.