Counterparty Risk Management and the Global Legal Entity Identifier (LEI)

Abstract

The global legal entity identifier (LEI) system is a recently launched standard for unique, universal and unambiguous identification of financial market participants endorsed by the leadership of the G20 and supported by the Financial Stability Board and financial regulators in all the major jurisdictions. This paper uses a variety of sources of information to assess (i) the business impact of the LEI, and associated reporting and clearing requirements, on OTC derivatives markets business; (ii) and the application of LEI and associated relationship data (eg ownership) to managing and monitoring OTC counterparty and systemic financial risk. It finds that these regulatory measures have had unintended costs (prompting withdrawal of firms from OTC derivatives markets; imposing unnecessarily large though largely transitional costs of compliance); and while the LEI will yield substantial industry benefits a considerable amount of work remains yet to be done if it is to be useful for the measurement and management of counterparty and systemic risk.

Keywords: OTC derivatives, counterparty risk, CVA, regulatory compliance, financial regulation, systemic risk, standard setting, financial data management

JEL Classification: G20, G28, M15