If we had a legal entity identifier in place could we have seen the problem building up? The short answer is yes.
At this week’s U.S. Senate Banking Committee hearings on Swaps regulation both SEC Chairman Schapiro and CFTC Chairman Gensler were asked when and how they became aware of JPMorgan Chase’s (JPM) hedging difficulties. They both answered they first heard about it through the media. Revelations from the financial crisis taught us that regulators did not have the tools to see into the financial institutions they were charged with overseeing. Obviously we haven’t fixed that problem yet. But there is hope that a global initiative known as the legal entity identifier project will.
The LEI is at the beginning of a long chain of regulatory initiatives to monitor financial institutions through the transactions they engage in and the risk exposures they engender. The very first pillar of global financial reform is a standard for an automated coding scheme for identifying the same financial market participant to each regulator in the same way. Getting agreement on a globally unique and standardized legal entity identifier is the first test of putting this computerized all-knowing-all seeing-capability in place. The G20’s Financial Stability Board, an entity with a broad charter to risk adjust the financial system has begun laying the foundation for such a regulatory capability.
