Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The Dodd-Frank Wall Street Reform and Consumer Protection Act established the Office of Financial Research and provides it with the authority to collect data to support the Financial Stability Oversight Council, or FSOC,  and to set standards for reporting such data.  To support the FSOC in identifying connections among market participants and monitoring systemic risk, the Office of Financial Research, or OFR, intends to standardize how parties to financial contracts are identified in the data it collects on behalf of the FSOC.  

In 2010, the OFR issued a statement of policy regarding its preference to adopt a universal standard for identifying parties to financial contracts that is established and implemented by private industry and other relevant stakeholders.  The OFR sought comment on a statement of policy, including but not limited to the desired characteristics for a Legal Entity Identifier, or LEI, and the institutional arrangements for issuing and maintaining identifiers and associated reference data.  An LEI is a unique number that would identify a legally distinct entity that engages in financial market activities.  Currently, there are many ways to identify entities, but there is no universal identification scheme for legal entities across markets and jurisdictions.

The OFR has issued a statement on the progress made to date and next steps forward in the global initiative to establish an LEI.   The OFR noted that although significant progress has been made to date in developing an LEI—including discussions of principles by global regulators; recommendations by a global coalition of financial services firms and trade associations; a technical specification for the identifier by an international standards body; and proposals by parties to manage the LEI—additional work needs to be done to build international consensus on key issues before the OFR issues a rule.

Because of the work that has been done to date, the OFR believes that sufficient progress can be made to allow for an initial phase of implementation in 2012, consistent with the needs of regulatory authorities in a variety of jurisdictions.  The OFR intends to issue a notice of proposed rulemaking consistent with that timeline.  In the United States, the OFR’s objective remains to coordinate with the SEC and CFTC, which are issuing rules for reporting swap transactions to trade repositories, and for all three agencies to require the same system for identifying parties in reporting.

During the recent crisis, the lack of a universal entity identifier made it difficult for firms and regulators to assess market exposures to risky or failing institutions.  An LEI would promote financial stability by illuminating those exposures.  It would also contribute to market efficiency by enhancing transparency for investors, reducing reporting burdens and other operational costs for financial firms, and improving customer service. 

Check frequently for updates on the Dodd-Frank Act and other important securities law matters.

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