[Federal Register Volume 75, Number 229 (Tuesday, November 30, 2010)]
[Notices]
[Pages 74146-74148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30018]


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DEPARTMENT OF THE TREASURY


Office of Financial Research; Statement on Legal Entity 
Identification for Financial Contracts

AGENCY: Office of Financial Research, Treasury.

ACTION: Statement of policy with request for comment.

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SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(the ``DFA''), Public Law 111-203, establishes the Office of Financial 
Research (the ``Office'') and provides it with the authority to collect 
data to support the Financial Stability Oversight Council (the 
``Council'') and to set standards for reporting such data. To support 
the Council in identifying connections among market participants and 
monitoring systemic risk, the Office intends to standardize how parties 
to financial contracts are identified in the data it collects on behalf 
of the Council. The Office is issuing a statement of policy regarding 
its preference to adopt through rulemaking a universal standard for 
identifying parties to financial contracts that is established and 
implemented by private industry and other relevant stakeholders through 
a consensus process. The statement of policy provides guidance on how 
the Office will evaluate whether a standard is adequate for adoption, 
including its attributes and method of implementation. The Office seeks 
comment on this statement of policy, including but not limited to the 
desired characteristics for a Legal Entity Identifier (``LEI'') and the 
institutional arrangements for issuing and maintaining identifiers and 
associated reference data.

DATES: Comments must be received by January 31, 2011.

ADDRESSES: Interested persons are invited to submit comments regarding 
this Statement according to the instructions for ``Electronic 
Submission of Comments'' below. All submissions must refer to the 
document title. The Office encourages the early submission of comments.
    Electronic Submission of Comments. Interested persons must submit 
comments electronically through the Federal eRulemaking Portal at 
http://www.regulations.gov. Electronic submission of comments allows 
the commenter maximum time to prepare and submit a comment, ensures 
timely receipt, and enables the Office to make them available to the 
public. Comments submitted electronically through the http://www.regulations.gov Web site can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.
    To receive consideration as public comments, comments must be 
submitted through the method specified above. All submissions must 
refer to the title of the Statement.
    Public Inspection of Public Comments. All properly submitted 
comments will be available for inspection and downloading at http://www.regulations.gov.
    Additional Instructions. In general, comments received, including 
attachments and other supporting materials, are part of the public 
record and are made available to the public. Do not submit any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.

FOR FURTHER INFORMATION CONTACT: For further information regarding this 
Statement contact the Office of Domestic Finance, Treasury, at (202) 
622-1766. All responses to this Statement should be submitted via 
http://www.regulations.gov to ensure consideration.

SUPPLEMENTARY INFORMATION: 

I. Background

A. The Office of Financial Research

    Section 152 of the DFA established the Office within the Department 
of the Treasury. Among other things, section 153(a) of the DFA 
authorizes the Office to collect data to support the Council's duties, 
to provide such data to the Council and member agencies, and to 
standardize the types and formats of such data. Section 153(a) also 
provides that the Office should assist member agencies in determining 
the types and formats of data authorized by the DFA to be collected by 
member agencies. Section 154(b)(2)(A) requires the Office to prepare 
and publish a financial company reference database, a financial

[[Page 74147]]

instrument reference database, and formats and standards for data 
reported to the Office. Section 151(6)(B) provides that those data 
include information that identifies counterparties.

B. The Need for a Universal Standard for Identifying Parties to 
Financial Contracts

    Precise and accurate identification of legal entities engaged in 
financial transactions is important to private markets and government 
regulation. In the private sector, data identifying counterparties 
support communication between systems, facilitate transaction 
processing, and allow for accurate aggregation of positions vis-
[agrave]-vis individual or classes of counterparties, which is 
necessary for effective risk management and calculation of margin. 
Sales, compliance, and due diligence functions also rely on unique 
identification of counterparties. In the public sphere, correctly 
identifying parties to financial contracts is critical to assessing the 
connections among financial firms and to monitoring systemic risk.
    There is currently no universal system for identifying the legal 
entities that participate in financial markets. In the absence of such 
a system, private firms and regulators have created a variety of 
identifiers. This creates inefficiencies for firms and presents 
obstacles to regulators and policymakers.
    At private firms, because there is no industry-wide legal entity 
identification standard, tracking counterparties and calculating 
exposures across multiple data systems is complicated, expensive, and 
can result in costly errors. For example, maintaining internal 
identifier databases and reconciling entity identification with 
counterparties is expensive for both large firms and small firms. 
Complete automation of back-office activities remains elusive, in part 
because of the lack of a universal identifier for legal entities. In 
the worst case scenario, transactions are broken or fail to settle 
because counterparties have not been properly identified.
    The lack of a universal identification standard also poses problems 
for regulators and policymakers. For example, precise identification of 
financial firms is necessary to evaluate whether a firm poses a 
systemic risk, which involves the assessments of the relationships 
among firms operating across a range of markets. Indeed, the problems 
that firms face in aggregating exposure are magnified in measuring risk 
across the system. In addition, securities regulators must often 
identify parents and affiliates of broker-dealers manually and by name. 
Multiple and generally different identifiers for participants in 
securities trading make it difficult to create a consolidated order 
audit trail.
    The financial crisis has focused both industry and regulators on 
this issue. The DFA created the Office, in part, to support the Council 
and its member agencies in addressing such data standardization issues. 
Sections 153 and 154 of the DFA require the Office to standardize the 
types and formats of data reported to and collected by the Office on 
behalf of the Council, and to prepare and publish formats and standards 
for that data. Section 151(6)(B) provides that those data include 
information that identifies counterparties.
    In addition, section 154(b)(2) of the DFA requires the Office to 
prepare and publish a financial company reference database. Reference 
data for a legal entity could include its name, country of 
incorporation or principal place of business, and legal relationship to 
other entities. Identification of the legal entity is a fundamental 
ingredient in creating a reference database of financial companies.
    Finally, the DFA requires the CFTC and SEC to put in place 
requirements for reporting swaps and security-based swaps, 
respectively, to data repositories by July 15, 2011. Public Law 111-
203, Sec. 727-728. These agencies are working to develop standards for 
this reporting, including requirements for these data repositories to 
have unique and consistent identifiers for counterparties and reference 
entities.\1\ The Office is coordinating with the CFTC and the SEC in 
these data standardization efforts.
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    \1\ See: http://www.cftc.gov/ucm/groups/public/@otherif/documents/ifdocs/federalregister112210.pdf; and http://sec.gov/rules/proposed/2010/34-63446.pdf.
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II. Statement of Policy

    In support of the Council's duties to identify and assess risks and 
potential threats to the stability of the U.S. financial system, the 
Office, in consultation with the Chairperson of the Council, intends to 
establish requirements for reporting data on financial contracts to the 
Office that include a standardized way of identifying counterparties. 
In establishing such rules the Office would prefer to adopt a universal 
standard developed and implemented by the financial industry and other 
relevant stakeholders through a consensus process. In addition, the 
Office believes that participation of international standard setting 
bodies would be beneficial in developing a standard that can be used 
widely.
    If a LEI is established to the satisfaction the Office by July 15, 
2011, the Office, in consultation with the Chairperson of the Council, 
plans to issue a regulation mandating the use of such a standard for 
data reported to the Office.
    In making this determination the Office will consider the following 
aspects of LEI systems:
     The characteristics of the LEI, including the process of 
developing and maintaining standards for the LEI;
     The institutional arrangements for issuing LEIs to 
specific legal entities; and
     The institutional arrangements for developing, 
maintaining, and publishing related reference data.

A. Characteristics of the LEI, Including the Process of Developing and 
Maintaining Standards for the LEI

    A LEI acceptable for use with data reported to the Office should:
    (1) Be based on a standard developed and maintained via an 
international ``voluntary consensus standards body,'' as defined in 
Office of Management and Budget (``OMB'') Circular No. A-119 Revised, 
such as the International Organization for Standardization (``ISO'');
    (2) Be unique for each legally distinct entity, where each legal 
entity is assigned only one LEI which cannot be reassigned;
    (3) Persist over the life of an entity regardless of corporate 
actions or other business or structural changes;
    (4) Include minimal information about the entity in the identifier 
itself; \2\
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    \2\ The identifier itself should not incorporate substantial 
information about the entity, such as name or principal place of 
business. Although such reference data may be useful, they are 
subject to change. Defining an identifier to include such 
information could threaten its persistence.
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    (5) Accommodate growth in the number of legal entities that need to 
be identified in the full range of reporting systems and to potential 
industry and regulatory innovations;
    (6) Be available for all eligible markets participants, including 
but not limited to all financial intermediaries, all companies that 
issue stock or debt listed on an exchange, all companies that trade 
stock or debt, infrastructure providers, all entities subject to 
financial regulation, and firms affiliated with such entities;
    (7) Not be contractually restricted in use;
    (8) Where possible, be compatible with existing systems, work 
across various platforms, and not conflict with

[[Page 74148]]

other numbering or identification schemes;
    (9) Be readily accessible using secure and open standards;
    (10) Be reliable and secure against corruption or misuse; and
    (11) Be capable of becoming the single international standard for 
unique identification of legal entities in the financial sector.

B. Institutional Arrangements for Issuing LEIs

    A LEI acceptable for use with data reported to the Office should be 
issued by an entity with expertise in implementing standards for the 
financial sector.
    The entity should be organized and operated as a not-for-profit 
body and have a formally documented governance structure with balanced 
representation for relevant stakeholders. It should be subject to 
supervision and regulation. The entity should also have a strong ethics 
policy, addressing in part potential conflicts of interest.
    Issuance of LEIs must be timely and non-discriminatory. The process 
of issuing new LEIs must not materially hinder the normal course of an 
entity's business.
    All of the entity's processes must be adequately governed and 
auditable. Access to the master identifier list and the issuance 
process for new identifiers must be made available at all times.
    The security and reliability of all IT systems involved in 
identifier issuance and database maintenance and publication must meet 
or exceed industry standards for a real-time, high-availability market 
service.
    Identifiers must be available to the public without fees for 
storage, access, cross-referencing, or redistribution. However, 
consistent with OMB Circular No. A-119 Revised, the cost of issuing 
identifiers and maintaining their reliability may be recovered through 
other fees, as long as they are reasonable and they are not imposed on 
end-users.

C. Institutional Arrangements for Developing, Maintaining, and 
Publishing LEI Reference Data

    A LEI acceptable for use with data reported to the Office should 
have a closely associated process for developing, maintaining and 
publishing related reference data for each LEI issued.
    The scope of the reference data provided for each LEI issued should 
be sufficient to verify that users have correctly identified an entity 
and should include at a minimum the following information for each 
identifier:
    (1) Name;
    (2) Location;
    (3) Electronic address; and
    (4) Legal status.
    The entity responsible for producing and publishing the LEI 
reference data should have expertise in this area. It must be operated 
on a not-for-profit basis and have a formally documented governance 
structure with balanced representation for relevant stakeholders. It 
should also be subject to supervision and regulation.
    The entity must have a robust quality assurance process. Updates to 
the LEI reference data should be accomplished with minimal lag time and 
market participants and regulators should be able to challenge entries 
and request amendments. The quality assurance process should seek to 
ensure that duplicate identification numbers are not erroneously 
assigned. The quality assurance process should also include checks for 
existing entities including name searches, address searches, and 
combinations of text strings and other characteristics.
    The entity's processes should be adequately governed and auditable. 
The security and reliability of all IT systems involved in developing, 
maintaining, and publishing LEI reference data should meet or exceed 
industry standards for a real-time, high availability market service. 
Reference data must be available to the public without fees for 
storage, access, cross-referencing, or redistribution. However, 
consistent with OMB Circular No. A-119 Revised, the cost of developing, 
maintaining, and publishing LEI reference data may be recovered through 
other fees, as long as they are reasonable and they are not imposed on 
those who use the reference data.
    In addition, if a robust universal LEI is designated by the Office, 
under the principles outlined above for the purpose of reporting data 
to the Office, it is the expectation of the Office that such a LEI 
system, including the relevant reference data, would be the foundation 
for the financial company reference database that the Office would 
publish under the DFA section 154(b)(2)(A)(i).

D. Next Steps

    In the event that a universal LEI is established to the 
satisfaction of the Office by July 15, 2011, the Office, in 
consultation with the Chairperson of the Council, plans to issue a 
regulation mandating the use of such a standard for data reported to 
the Office. Further, the Office will publish in the Federal Register, 
no later than 60 days prior to the earlier of the implementation dates 
established by the CFTC and SEC for their new reporting 
requirements,\3\ the name of the identification system approved by the 
Office, the name and contact information of the entity through which 
counterparties can obtain LEIs provided through the approved 
identification system, and information concerning the procedure and 
requirements for obtaining such a LEI.
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    \3\ See: http://www.cftc.gov/stellent/groups/public/@otherif/documents/ifdocs/federalregister112210.pdf; and http://sec.gov/rules/proposed/2010/34-63446.pdf.
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    The Office invites comments on all aspects of this statement of 
policy, including but not limited to the desired characteristics for 
LEI and the institutional arrangements for issuing and maintaining 
identifiers and associated reference data.

    Dated: November 23, 2010.
Lewis Alexander,
Counselor to the Secretary.
[FR Doc. 2010-30018 Filed 11-29-10; 8:45 am]
BILLING CODE 4810-25-P