Being in the Know

David Loshin at Informatica has been reading the Dodd-Frank Act, and the policy statements coming out of the new Office of Financial Research (OFR), so that I don't have to.

The OFR is urging the financial services industry to adopt a standard for Legal Entity Identifier. As Loshin succinctly puts it: "Aside from the operational error scenarios, the inability to accurately identify counterparties means that there are challenges in assessing risk and evaluating aggregate exposure, especially when the company is unsure of the scale of the transactions and types of products traded."

The analog issue in the insurance industry is that of contract certainty in markets like Lloyd's. The insurance community has worked hard to create contract certainty through standards, and the solution has been more complex than just party identifiers. Although progress to contract certainty was partly inspired by regulators, I think it's fair to say that the industry was already moving in the right direction.

The question for organizations in the financial markets is: Are you ready to assume the full risks of the trades you are making? If banks continue to believe they're "too big to fail", then no amount of industry standards will insulate the taxpayer against potential future bailouts.

One of the great things about insurance is that, while the buck (the risk) may pass around the market,the buck always stops in the market. The industry picks up its own tab. If trading parties want to evaluate and monitor their relationships effectively, then an industry standard for identifying parties will help a lot. But the logic doesn't run the other way. Creating a standard Legal Entity Identifier is a good start, but a clearer or safer system is something people need to want. Thanks Mr. Loshin for your thoughts. Much appreciated.   Informatica

Comments

[David Loshin]

Thanks for the head's up, Gregory. Note, though, that I am an invited guest blogger at Informatica and actually work for Knowledge Integrity (www.knowledge-integrity.com) and provide more continuously updated blog entries at http://dataqualitybook.com. Looking forward to your continued comments!

[David Loshin]

Thanks for the nod, I appreciate it! As I think you suggest, I believe that a mandated approach to standards is probably going to be less effective than standards that are defined and governed within the industry.