The legalentityidentifier.info is a product of the Real Semantics framework, both in the sense that it incorporates parts of Real Semantics and in the sense that the Real Semantics framework assembles the software components and data that make up the site. This article, which is part of the Real Semantics documentation, explains the unique attributes of the the legalentityidentifier.info site the relationship it has with Real Semantics. It is aimed at a wide audience, which may or may not be knowledgable about reference data, the financial industry, semantic technology or cloud computing, so we will start with the business case and explain how we apply technology to it.

Ontology2 has long been a leader in the commercialization of large-scale semantic databases such as Dbpedia and Freebase. Replacing imprecise names and addresses with specific identifiers is what we do, so we took an interest in the LEI system and started legalentityidentifier.info in August 2014. Our LEI site is what we call an interpretive browser in that it combines a raw information source with additional information, rules and machine learning models to supplement that data with expert commentary.

During the 2008 Financial Crisis, the industry and regulators were in a state of fear and ignorance about the total amount of money owed by derivative markets participants, an amount, on paper, that could have been greater than the U.S. GDP. As a result, the G20 began the process to create a global Legal Entity Identifier which is overseen by the Global Legal Entity Identifier Foundation.

About Legal Entity Identifiers

A Global Perspective

At this time, the LEI system is driven primarily by the requirements of government regulators. That's a big topic because there are a large number of government regulators in many different countries and jurisdictions. Many of the challenges faced by the system are rooted in the fact that it is international and has to reflect very different conditions in different parts of the world. For instance, in the United States, there are a large number of federal financial regulators that have different domains. The Securities and Exchange Commission regulates stocks and bonds in the US, while the CFTC regulates options and futures. The FDIC, Federal Reserve Board and Office of the Comptroller of the Currency play a role in the federal regulation of banks, together with the National Credit Union Administration regulating credit unions, as well as the Consumer Financial Protection Bureau and the Federal Financial Institutions Examination Council. So far as banks and insurance companies are concerned, all 50 states charter and regulate financial institutions as well. All businesses in the U.S. are registered in a state or territory, and the rules of that registration are quite different in different states. For instance, if you form a corporation in New York you need to specify a board of directors (which is a matter of public record) and have an annual meeting which is documented with the state. In nearby Delaware, a single person can register a corporation and nothing about the people involved is in the public record. Now the U.S. is a large country where states have an unusual amount of autonomy, but you find large variations in regulatory regimes in various countries, particularly when transparency and privacy are concerned. In the UK, for instance, businesses are regulated with Companies House; which makes a large amount of information available on their web site and via an API. Other countries, like the Cayman Islands and Luxembourg, value privacy more than transparency, and publish very limited information, like the state of Delaware. Such "corporation havens" are chosen by registrants on a global free market, but countries that have a different view of the relationship between states and business such as China and Saudi Arabia which see the activities of state-owned enterprises as state secrets. The result of all this is that the LEI system is a compromise between a number of interests, and largely reflects a "lowest common denominator" of what is available. Relationships between entities (fund/administrator, subsidiary/parent, or branch/master) are an important requirement for risk data aggregation, but these are very much a work of progress because of cross-jurisdictional issues.

Regulatory applications of the LEI CFTC Swap reporting The first application of the LEI for regulation was for the CFTC swap reports, which led to the requirement that organizations that trade OTC derivatives in the US register for LEIs. Swaps are financial tools used for many purposes, such as converting a variable interest rate into a fixed interest rate. A major category of swap is the credit default swap, which can be thought of a form of insurance you can buy on a bond. When Lehman Brothers collapsed in 2008, more than $400 billion worth of swap contracts existed on the company, an amount greatly larger than Lehman's debt. Things turned out to be less dire than expected, however, because most swap market participants held positions that canceled. Swaps are a bit different from stocks and bonds, because you can't just "buy" a swap and them "sell" it the way you would with a stock when you don't like the price. Instead, dealers and traders enter into an position in the opposite direction which cancels out the original position. Once positions were netted out, the amount that changed hands was a relatively modest $7.2 billion. Most swap dealers did a good job of managing risk in their swap books, thus protecting the system, but AIG notoriously sold CDS derivatives without hedging the risk, leading to a $180 billion bailout. It took quite a while to figure all this out, leading to a large amount of fear and paralysis on the part of the industry, and the CFTC swap reports were introduced to provide clarity in case of a repeat. The idea here is that transactions made at swap execution facility are submitted one of several swap data repositories (SDR.) The data sent to the SDRs uses the LEI to identify the parties to the transaction as well as other entities involved (such as the issuer of bonds insured by a CDS.) SDRs in turn send summary data to the CFTC.The summary data is of limited use because it is not netted (for instance, two parties trading with each other could create a large visible volume without incurring any liability) but in the event of an emergency, regulators can "break the glass" to look at individual trades and positions to get a global view. EMIR and MiFID II Today, Europe is taking the lead in the adoption of the LEI. EMIR targeted over-the-counter derivatives and, among other things, developed a swap reporting system similar to that in the U.S. MiFID 2 addresses exchange traded securities and public corporations; it represents a huge advance in reporting standards, introducing both the LEI as a standard identifier and the creation of machine-readable XBRL reports as pionereed in the U.S. Other applications These will take time to develop, but in most cases where legal entities interact with the government, the LEI could be a useful identifier. For instance, businesses that contract to provide goods and services with the U.S. government are required to get a proprietary D-U-N-S number. Federal agencies don't have access to the full D-U-N-S database, so this gets in the way of doing analytics about procurement. It has been proposed that the LEI be used as a replacement for D-U-N-S. A while ago I worked on a search engine for patents and got an insider point of view of the difficulties of that domain. Patents are issued to individuals but are frequently assigned to corporations; if you look at the "asignee" field, however, you find that this field is completely uncontrolled. Our data science team found that there were more than 1000 ways that people wrote "IBM". We were able to match these records with considerable effort, but certainly the results were imperfect. It has been proposed, similarly, that the LEI be used to identify the assignees of patents.

An industry perspective To fill out the story, the financial industry has it's own motivations to get better control of reference data. The folks at Financial InterGroup call this the "Barcodes of Finance". The key idea is that behind every trade and customer facing interaction (front office), a bunch of work has to be done to document and finalize the transaction (back office). Historically, and often today, back office work involves manually filled forms with imprecise, natural language names and identifiers. It is necessary to track legal entities, financial products, and trades, and with a sufficiently accurate and fast system shared by all participants, straight-through processing becomes possible. Straight-through processing has vast benefits, including reduced cost, greater speed and a reduction of clerical errors. The long time involved in international transfers is itself a source of risk. As of mid-2016, there is a large interest in using blockchains to automate payment and trading systems, but whatever the underyling technology is, correct and precise identification of who is participating and what they are trading is essential to any improvement or reform. So long as the LEI as seen as an imposition that comes from regulators, the quality of data is always going to be the least that people can get away with -- thus, meeting industry needs is the direct path to satisfying the needs of regulators. Over the long term we look towards improvements in the LEI system that enable an increasing number of private and public applications.