Bloomberg Tries Hand at Legal Entity Identifiers (Updated)

(Editor’s Note: This article has been updated to reflect additional information received after its initial publication).

Does the financial market really need another New York City-based organization issuing legal entity identifiers (LEIs)?

How Bloomberg intends to compete with established providers like the Depository Trust & Clearing Corporation (DTCC), London Stock Exchange and Germany’s WMDatenservice is just one of the questions rising from the data giant’s application to the Global Legal Entity Identifier Foundation (GLEIF) to become a local operating unit (LOU). The answer: it’s unclear based on the limited information in the announcement posted on Bloomberg’s website this month.

The GLEIF’s accreditation would allow the commercial data giant to issue LEIs the same way 28 other organizations do around the world. As a market infrastructure, DTCC is already the largest global player issuing over 200,000 LEIs since the creation of its Global Market Entity Identifier (GMEI) utility in 2012, with the number representing a fifty-fifty split between US and non-US firms. DTCC collects and verifies the documentation while global messaging network SWIFT, its LOU partner, actually issues the LEIs. The application for an LEI can also be made through CUSIP Global Services, the US national numbering agency for financial instruments.

Regulators have enthusiastically supported the legal entity identifier, a standard code developed under the auspices of the International Organization for Standardization (ISO), as key element in regulatory reporting. Its development, which was long mired in debate, finally was achieved in the same general timeframe that regulators got serious about keeping track of the financial exposure of organizations worldwide to monitor the risk that failure of one could snowball into a broader economic downturn. Relying on the current hodgepodge system of multiple standards for identifying trading partners was deemed far too risky.

The GLEIF was established by the Financial Stability Board in June 2014 to support the issuance of LEIs by LOUs, approved organizations in local markets, and the adoption of the codes. In the slow recovery from the global recession triggered by the bankruptcy of Lehman Brothers and the near-failure of other financial giants in 2009, it was clear that few financial firms could accurately measure the scope of their exposure to their trading partners and general market activity. As a non-profit group headquartered in Basel, Switzerland, the GLEIF is overseen by the Regulatory Oversight Committee (ROC), from which it has absorbed responsibility for day-to-day operations, including approval of LOUs.  GLEIF’s board comprises banking, corporate and standards experts.

The requirement for businesses entities to register for LEIs is expected to grow exponentially over the next two years to an estimated two million identifiers, leaving LOUs to urge financial firms to speed up their application process for LEIs to avoid a last minute rush. Existing regulations such as the Markets in Financial Instruments Directive (MiFID), the European Market Infrastructure Regulation (EMIR) and new ones such as the Central Securities Depository Regulation (CSDR) and the Securities Finance Transactions Regulation (SFTR) call for LEIs to be used to identify business units and their counterparties. The CFTC and Securities and Exchange Commission are also encouraging the use of LEIs for some of their rules.

Try Try Again

Bloomberg’s recent application isn’t the first time it has tried to become an LOU. In a blog appearing on its website, the firm says that it wanted to do so when the concept of a global legal entity identification system first emerged in 2012. However, it could not because it was not supported by a local regulatory agency — as was required by the GLEIF’s predecessor ROC. DTCC’s LEI utility, previously known as CICI Utility,was blessed by the CFTC, while the London Stock Exchange’s had the backing of the UK’s Financial Conduct Authority and WMDatenservice had the nod of the Bundesanstalt fur Finanzdiestleistungsaufsicht. The GLEIF has changed some of the rules for approving LOU status, including requiring regulatory endorsement. Organizations already approved by the ROC must reapply for the GLEIF’s blessings under the same rules as new wannabe LOUs, but can continue issuing LEIs in the meantime.

Bloomberg’s bold move appears to its campaign to issue identification codes for financial instruments. Bloomberg has publicly said that its Financial Instrument Global Identifiers, or FIGIs, should complement, if not replace, the ISO-backed International Securities Identification Number, or ISIN, as the standard for trading and post-trade processing. However, Bloomberg also consistently touts the superiority of FIGIs to ISINs, saying that ISINs are not “fit for purpose” when it comes to identifying some financial instruments — namely over-the-counter derivatives.

Among its biggest challenges in establishing the FIGI as an alternate instrument identifier, Bloomberg has never been able to issue FIGIs as a national numbering agency or obtain equivalent recognition for the standard from ISO. Citing the backing of the Object Management Group, a technology standards organization, Bloomberg has heavily lobbied regulators to accept FIGIs as well as ISINs for reporting purposes. Those efforts hit a wall when the European Securities and Markets Authority stated that ISIN was the preferred instrument identifier for regulatory reporting and an ISO-backed study group was tasked with the job of developing an ISIN-based standard for OTC derivatives. The goal is to meet a January 2018 deadline in time for the second incarnation of MiFID.

In the case of LEIs, or legal entity identifiers, Bloomberg appears to have an easier path to accreditation, giving it a level playing field with other LOUs. GLEIF’s chief executive Stephan Wolf says that even though a specific regulatory body doesn’t have to back a potential LOU’s application, the approval process remains rigorous.

First, the LOU applicant must sign a preliminary “master agreement”– an initial nod — that it is willing to accept the GLEIF’s terms for doing business. Further documentation is offered on the prospective LOU’s operational, financial and technological capabilities, which is then vetted by the GLEIF’s staff before a recommendation for approval is made by Wolf to the GLEIF’s 14 member board of directors for final sign-off. The paperwork which must be filed by the prospective LOU can be found on the GLEIF website. GLEIF says a DTCC wholly-owned subsidiary Business Entity Data BV signed a “master agreement” in March 2016. GMEI utility represents the brand name of the service.

In accepting applications from aspiring new LOUs, GLEIF is clearly more interested in promoting competition than its predecessor, the ROC. It apparently does think that there is room for more than one LOU per country. “We want to give companies a choice of LOUs based on multiple factors such as data quality, timeliness, pricing, and other services,” says Wolf, who worked as a chief technology officer for Interactive Data before joining GLEIF.

Among the other firms now seeking LOU status in addition to Bloomberg are AMECE-GS1 in Mexico, Kamer van Koophandel in the Netherlands, Bundesanzeiger Verlag in Germany, KDPW in Poland and the Tokyo Stock exchange. Bundesanzeiger Verlag would be up against WMDatenservice.

What Edge?

What does Bloomberg think of its prospects against DTCC? In responding to emailed questions for comment, a spokesperson says the following: “Due to the increasing relevance and exposure of the LEI across the globe, the marketplace has shown ample room for LOU expansion. By introducing optionality — which provides entity representatives with a choice of facility which to request a profile — issuers are more likely to adopt and adhere to best practices and quality standards. This, in turn, should improve the registrant’s experience and attract more firms to register.”

But that response suggests that companies will gravitate to Bloomberg instead of DTCC simply because they have a choice, or perhaps because one provider has better prices or service than the other. In brushing away any worries over Bloomberg, DTCC counters that non-US entities would use the GMEI utility because it offers the strongest capabilities in validating legal entities globally, relying on  intellectual property from DTCC’s wholly-owned subsidiary Avox. DTCC bought the legal entity data cleansing firm from Deutsche Boerse in 2010.

A global firm, says DTCC, may also wish to select the GMEI utility when it is required to register as many subsidiaries or affiliates located in multiple markets because there is an advantage in consolidating LEI registration and renewal. Whats more, DTCC believes that it offers the most services of any LOU when it comes to registrations, renewals and payment options in different currencies and it has the fastest turnaround time of any LOU — typically 24 to 48 hours. Last but not least, DTCC has size on its side.

DTCC’s commanding lead and global reach might allow the market infrastructure the luxury to not worry about the competition. Not so with other LOUs that might be concerned about a price war. Several contacted by FinOps would not comment on Bloomberg’s  announcement. Although the GLEIF cannot mandate what an LOU will charge for issuing LEIs. it does require that its pricing model be based on cost-recovery. However, a commercial entity such as Bloomberg could easily cross-subsidize its LOU work and undercut market infrastructure rivals.

Bloomberg won’t disclose what it would charge a firm to receive an LEI. DTCC says it charges US$200 per LEI with an additional US$19 fee to be paid to the GLEIF. The LSE relies on a volume-based approach charging 115 British pound sterling for each individual LEI a firm needs up to 10 LEIs.

The DTCC and LSE offer the ability to download the LEIs they issue for free. If financial firms want to download a datafeed of LEIs issued by other LOUs they can always go to the GLEIF’s website. Bloomberg would only say that the LEIs it issues would be accessible through its web portal based on the GLEIF’s pricing rules.

Bloomberg has promoted its FIGIs as an open standard and they available for free. However, so far, most of the interest in FIGIs appears to have come from front office trading units which are also relying on Bloomberg’s datafeeds, data terminals, trade order management and execution platforms and analytical services. Those same units are a likely market for LEIs issued by Bloomberg, especially as needed to report on trades initiated on the Bloomberg platforms.

Attaining the status of an LOU may offer Bloomberg’s more credibility in its pursuit of official recognition of the FIGI. Whether it will make a difference for the firms that apply for LEIs or the firms that use them is another matter. Operations managers at three US broker-dealers were hesitant to consider Bloomberg as a contender until they said a test run. “It will all depend on price, speed of LEI issuance, data accuracy and thoroughness and ease of accessibility,” said a director of operations a top-tier Wall Street firm.