Department of Treasury - Statement on Legal Entity Identification for Financial Contracts

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TheDodd-FrankWallStreetReformandConsumerProtectionAct(the“DFA”), Pub. L. No. 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.
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  1 DEPARTMENT OF THE TREASURYOffice of Financial ResearchStatement on Legal Entity Identification for Financial ContractsAGENCY: Office of Financial Research, Treasury. ACTION: Statement of policy with request for comment. SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA”),Pub. L. No. 111-203, establishes the Office of Financial Research (the “Office”) and provides itwith 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 identifyingconnections among market participants and monitoring systemic risk, the Office intends tostandardize how parties to financial contracts are identified in the data it collects on behalf of theCouncil. The Office is issuing a statement of policy regarding its preference to adopt throughrulemaking a universal standard for identifying parties to financial contracts that is establishedand implemented by private industry and other relevant stakeholders through a consensusprocess. The statement of policy provides guidance on how the Office will evaluate whether astandard is adequate for adoption, including its attributes and method of implementation. TheOffice seeks comment on this statement of policy, including but not limited to the desiredcharacteristics for a Legal Entity Identifier (“LEI”) and the institutional arrangements for issuingand maintaining identifiers and associated reference data. DATES: Comments must be received by [INSERT DATE THAT IS 60 days afterFEDERAL REGISTER PUBLICATION]  2 ADDRESSES: Interested persons are invited to submit comments regarding this Statementaccording to the instructions for “Electronic Submission of Comments” below. All submissionsmust refer to the document title. The Office encourages the early submission of comments. Electronic Submission of Comments. Interested persons must submit commentselectronically through the Federal eRulemaking Portal at www.regulations.gov. Electronicsubmission of comments allows the commenter maximum time to prepare and submit acomment, ensures timely receipt, and enables the Office to make them available to the public.Comments submitted electronically through the www.regulations.gov website can be viewed byother commenters and interested members of the public. Commenters should follow theinstructions provided on that site to submit comments electronically.To receive consideration as public comments, comments must be submitted through themethod specified above. All submissions must refer to the title of the Statement. Public Inspection of Public Comments. All properly submitted comments will beavailable for inspection and downloading at www.regulations.gov. Additional Instructions. In general, comments received, including attachments andother supporting materials, are part of the public record and are made available to the public. Donot submit any information in your comment or supporting materials that you considerconfidential or inappropriate for public disclosure. FOR FURTHER INFORMATION CONTACT: For further information regarding thisStatement contact the Office of Domestic Finance, Treasury, at (202) 622-1766. All responses tothis Statement should be submitted via www.regulations.gov to ensure consideration.  3 SUPPLEMENTARY INFORMATION:I.   BACKGROUNDA.   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 supportthe Council’s duties, to provide such data to the Council and member agencies, and tostandardize the types and formats of such data. Section 153(a) also provides that the Officeshould assist member agencies in determining the types and formats of data authorized by theDFA to be collected by member agencies. Section 154(b)(2)(A) requires the Office to prepareand publish a financial company reference database, a financial instrument reference database,and formats and standards for data reported to the Office. Section 151(6)(B) provides that thosedata 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 isimportant to private markets and government regulation. In the private sector, data identifyingcounterparties support communication between systems, facilitate transaction processing, andallow for accurate aggregation of positions vis-à-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 publicsphere, correctly identifying parties to financial contracts is critical to assessing the connectionsamong financial firms and to monitoring systemic risk.  4There is currently no universal system for identifying the legal entities that participate infinancial markets. In the absence of such a system, private firms and regulators have created avariety of identifiers. This creates inefficiencies for firms and presents obstacles to regulatorsand 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 databasesand reconciling entity identification with counterparties is expensive for both large firms andsmall 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 arebroken or fail to settle because counterparties have not been properly identified.The lack of a universal identification standard also poses problems for regulators andpolicymakers. For example, precise identification of financial firms is necessary to evaluatewhether a firm poses a systemic risk, which involves the assessments of the relationships amongfirms operating across a range of markets. Indeed, the problems that firms face in aggregatingexposure are magnified in measuring risk across the system. In addition, securities regulatorsmust often identify parents and affiliates of broker-dealers manually and by name. Multiple andgenerally different identifiers for participants in securities trading make it difficult to create aconsolidated order audit trail.The financial crisis has focused both industry and regulators on this issue. The DFA createdthe Office, in part, to support the Council and its member agencies in addressing such datastandardization issues. Sections 153 and 154 of the DFA require the Office to standardize thetypes and formats of data reported to and collected by the Office on behalf of the Council, and to
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