LEIs could conjure up cost benefits, says McKinsey & Company
31 October 2019 London
Image: Shutterstock
Banks could recoup some of the costs of creating legal entity identifiers (LEIs) under Securities Financing Transactions Regulation (SFTR) with operation cost savings elsewhere, according to a new market whitepaper.
The report by McKinsey & Company, in partnership with the Global Legal Entity Identifier Foundation, claims that savings of 鈥渁t least 10 percent of total operations costs for client onboarding and trading processing for banks adopting the LEI are possible鈥�.
An LEI is a unique code that identifies legal entities participating in financial transactions and is required by firms to fulfill their regulatory reporting obligations.
LEIs are already required under the European Market Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Regulation (MiFID), as well as being a key component of the EU鈥檚 SFTR, which is due to come into force in April 2020.
The report, entitled 鈥楾he Legal Entity Identifier: The Value of Unique Counterparty ID鈥�, emphasised that the LEI鈥檚 primary value, other than being required by market regulations, is derived from reducing the cost of onboarding clients and of middle- and back-office activities related to the processing of stocks, bonds, and other securities trades.
According to the report, the operational costs savings could amount to $150 million annually for the broader investment banking industry.
Commenting on the whitepaper, Simon Wood, CEO at Ubisecure, a software company, said that LEIs connect the many pieces of reference data for processes related to know-your-customer (KYC) and anti-money laundering rules.
鈥淚n most cases, different areas in the lender use different identifiers for the same client 鈥� and that makes what should be a simple task becomes very complex and expensive,鈥� he highlighted.
鈥淭he LEI enables cost-reduction by making the reference data standardised and readily available during both the initial KYC process and then the ongoing identification of counterparties as trades occur.鈥�
The whitepaper鈥檚 findings will be welcome news for many in the securities financing industry, who are in the midst of building LEIs into their transactions ahead of SFTR鈥檚 go-live. The LEI requirement of SFTR is often cited as one of the more burdensome features of the regulation due to its complexity and the cost of the technical build, compared to existing rules frameworks.
SFTR reporting requirements mandates 155 data fields, compared to 129 required under EMIR for over-the-counter derivatives.
Elsewhere, the International Securities Lending Association (ISLA) has repeatedly warned that the consequence of some market players not having their LEIs in place would be a drain on overall liquidity as they would be unable to transact in the securities finance markets once SFTR is live.
In a survey in September, ISLA warned that for LEIs to meet the requirements of SFTR.
ISLA鈥檚 market research, along with others, has shown that European market participants are well on their way to having LEIs in place for their securities finance transactions but that non-EU entities that will not directly be in-scope for SFTR are lagging behind in their preparations. This will create complications down the road as the regulation鈥檚 reporting requirements include transactions data from non-EU counterparts.
Commenting on this mismatch, Phillip Morgan, COO and head of sales at Pirum, explained that coverage of LEIs within the EU is relatively high driven by existing reporting regimes, such as EMIR and the MiFID, while adoption rates outside of the EU remain at lower levels.
鈥淭his will present challenges for institutions required to report an issuer LEI as part of their overall SFTR reporting requirement, especially as most firms transact and receive collateral in assets issued both within and outside of the EU,鈥� he explained.
鈥淲e鈥檙e working to support our clients with the sourcing of issuer LEIs when they are available and at the same time we鈥檙e also working with the trade association working groups to help highlight some of these challenges to the regulators and propose alternative, practical approaches.鈥�
The report by McKinsey & Company, in partnership with the Global Legal Entity Identifier Foundation, claims that savings of 鈥渁t least 10 percent of total operations costs for client onboarding and trading processing for banks adopting the LEI are possible鈥�.
An LEI is a unique code that identifies legal entities participating in financial transactions and is required by firms to fulfill their regulatory reporting obligations.
LEIs are already required under the European Market Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Regulation (MiFID), as well as being a key component of the EU鈥檚 SFTR, which is due to come into force in April 2020.
The report, entitled 鈥楾he Legal Entity Identifier: The Value of Unique Counterparty ID鈥�, emphasised that the LEI鈥檚 primary value, other than being required by market regulations, is derived from reducing the cost of onboarding clients and of middle- and back-office activities related to the processing of stocks, bonds, and other securities trades.
According to the report, the operational costs savings could amount to $150 million annually for the broader investment banking industry.
Commenting on the whitepaper, Simon Wood, CEO at Ubisecure, a software company, said that LEIs connect the many pieces of reference data for processes related to know-your-customer (KYC) and anti-money laundering rules.
鈥淚n most cases, different areas in the lender use different identifiers for the same client 鈥� and that makes what should be a simple task becomes very complex and expensive,鈥� he highlighted.
鈥淭he LEI enables cost-reduction by making the reference data standardised and readily available during both the initial KYC process and then the ongoing identification of counterparties as trades occur.鈥�
The whitepaper鈥檚 findings will be welcome news for many in the securities financing industry, who are in the midst of building LEIs into their transactions ahead of SFTR鈥檚 go-live. The LEI requirement of SFTR is often cited as one of the more burdensome features of the regulation due to its complexity and the cost of the technical build, compared to existing rules frameworks.
SFTR reporting requirements mandates 155 data fields, compared to 129 required under EMIR for over-the-counter derivatives.
Elsewhere, the International Securities Lending Association (ISLA) has repeatedly warned that the consequence of some market players not having their LEIs in place would be a drain on overall liquidity as they would be unable to transact in the securities finance markets once SFTR is live.
In a survey in September, ISLA warned that for LEIs to meet the requirements of SFTR.
ISLA鈥檚 market research, along with others, has shown that European market participants are well on their way to having LEIs in place for their securities finance transactions but that non-EU entities that will not directly be in-scope for SFTR are lagging behind in their preparations. This will create complications down the road as the regulation鈥檚 reporting requirements include transactions data from non-EU counterparts.
Commenting on this mismatch, Phillip Morgan, COO and head of sales at Pirum, explained that coverage of LEIs within the EU is relatively high driven by existing reporting regimes, such as EMIR and the MiFID, while adoption rates outside of the EU remain at lower levels.
鈥淭his will present challenges for institutions required to report an issuer LEI as part of their overall SFTR reporting requirement, especially as most firms transact and receive collateral in assets issued both within and outside of the EU,鈥� he explained.
鈥淲e鈥檙e working to support our clients with the sourcing of issuer LEIs when they are available and at the same time we鈥檙e also working with the trade association working groups to help highlight some of these challenges to the regulators and propose alternative, practical approaches.鈥�
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