Banks, brokers and market regulators around the world have always faced the challenge of identifying individual counterparties and customers.
Within financial institutions, because of the siloed organisation of their business operations and IT systems, there are frequently multiple databases using different identity-management approaches that result in the same individual counterparty having multiple identities within a single bank or broker.
This, in turn, makes it even harder for a national market regulator to obtain a clear picture of the overall risk exposure of any one financial institution to any other organisation. The current international economic crisis is one result of the financial sector’s inability to address identity management efficiently.
Market regulators of the G20 countries have decided that this state of affairs must change. As a result, they’ve made the recommendation to the G20 countries this month that a global system of unique Legal Entity Identifiers(LEIs) must be introduced with immediate effect. It is intended that the governance structure for this new identification system should be in place in spring 2013 — less than a year from today.
In practice, this means that every organisation involved in financial markets — whether a service provider or customer — will have a new, unique identity that can be used around the world, both between organisations and within organisations. This should help financial institutions to reduce complexity and errors in their processing, and should help regulators to be aware faster and more broadly of the risks associated with any individual institution.
The recommendation to the G20 countries is that the global solution should be a federated solution. Each participating country would decide which organisation should be the issuer of its LEIs and would enable the interlinking of national solutions so that market participants can easily have access to all LEIs globally.
The LEI is a new standard for identity management for the financial sector.
By Chris Pickles, Head of Industry Initiatives, BT Global Banking & Financial Markets