Security and Business Entity Identifiers Concept Paper

March 15, 2002

Over the past 18 months, FISD members have been involved in a whole series of discussions associated with instrument and business entity identification requirements for the financial services industry. This discussion has been taking place on two levels. On one hand, the automation requirements of T+1 and straight through processing require a precise instrument identification scheme to eliminate inefficiencies and help mitigate the risks of trade failure. On the other, the blurring of lines and the increasingly complex interrelationships among legal entities, issuers and products require identification among business entities to help firms manage risk on an integrated basis, covering not only the risk of individual transactions, but also the risk of various asset portfolios and the entire enterprise. The essence of these identification requirements is fairly easy to conceptualize:

1. Instrument Identification: Financial institutions buy and sell a variety of instruments that can be issued, priced, traded and settled in many ways -- with multiple identification schemes. As such different types of identifiers are relevant at various levels for a variety of functions. The underlying problem is that the international standard (ISIN) identifier alone is not sufficient for the new requirements of automated cross-border security identification.
    
2. Business Entity Identification: Financial institutions interact with a variety of “entities” associated with trading, settlement and account management. Identifiers for these entities are required for counterparty identification on transactions, counterparty and issuer risk management, collateral management, legal agreements, corporate research, data management and regulatory reporting. The underlying problem is that international standard identifiers linking legal entities and subsidiaries with issues do not exist.

Business Entity Identification

Industry standard entity identifiers that create precise linkages between legal entities, subsidiaries and investment programs are required to help firms manage portfolio and enterprise-wide risk. Identifiers for these entities are required for many reasons:

• Counterparty identification on transactions (orders, trades, settlement, payments)
• Counterparty and issuer risk management
• Collateral management
• Data management (capture/sourcing, look-up and cross-referencing, maintenance)
• Legal agreements and documentation
• Corporate research
• Regulatory reporting

ISO Standards are Desired

Industry standard identifiers (BIC/ISO9362, MIC/ISO10383 and Country Code/ISO 3166) are available for some of these entities, however ISO standard identifiers for funds/portfolios and for non-financial entities are not. Other public domain identifiers (such as ALERT Access Codes, DTC SIDs, DUNS numbers, CUSIP prefix and EAN International GLNs) and a number of proprietary identifiers are available and in use, but the industry has strongly expressed and reinforced its desire for ISO standards in these areas.

Importance of Business Entity Identifiers (BEI)

Industry standard entity identifiers that create precise linkages between legal entities, subsidiaries and investment “programs” are required to help firms manage portfolio and enterprise-wide risk. Most firms are currently able to create effective links from an issuer to a specific issue within their security master databases. The problem they encounter is that there is no standard methodology for linking multiple investment programs to a common legal entity. Firms are currently using name (problems with accuracy and consistency), internal codes (manual and error-prone process) or proprietary codes (commercial concerns and redistribution restrictions) to create these linkages.

What’s desired is an industry standard master company identifier for non-financial entities that links issues to investment programs to legal entity. This type of coding scheme would make it easier for investment firms to assess and manage total risk. The current situation with Enron is a perfect example of the requirement. Enron (the legal entity) is at risk and firms need to know what issues in their portfolios are linked to the legal entity. Without such linkages, firms have a difficult time being able to gauge their total risk.

Historical Perspective

In 1998, a SWIFT Working Group was formed to address the identification of non-financial business entities. They recommended the assignment of BIC-standard codes to serve as a short-term solution to business entity identification. They also recommended the creation of a BEI ISO standard (13735) – as an “envelope” approach to leverage other existing standards. This specific ISO proposal did not receive the necessary support from the ISO membership (at the time) and was not progressed.

Since 1998, BEIs have on occasion been suggested as a solution to identifier requirements. In 2001, the SWIFT Pricing Board Task Force requested further investigation of the issue and another Working Group was formed. The Working Group identified and discussed business scenarios in two broad categories (entity and fund identification) in which BEIs would be useful.

Fund Identification Moves Forward

Building on the conclusions of SWIFT, the Securities and Treasury/FX groups agreed there was an immediate need for fund identifiers with two separate but related requirements: (1) To fulfill the role of the “common” GSTPA Account Identifier, an optional field included in GSTPA message formats and (2) to provide fund-level identification to eliminate the possibility of cross-matching in the Continuous Linked Settlement application for Custody third party FX settlement.

SWIFT has re-convened a working group on this topic, and the group has proposed a tactical solution involving appending the first 4 characters of a Custodian's BIC to the Custodian's internal account number for the fund. Issues outstanding center on how this information would be held and distributed in a way that would enable the Brokers and Investment Managers to validate the codes being communicated by telephone, fax, ALERT or other methods.

BEI Business Case Required

The motivation for moving a “universal” business entity identification standard forward must come from the risk managers. SWIFT is interested in pursuing the discussion, but is not in a position to drive the inquiry forward. The ANNA Service Bureau (ASB) is well positioned to create some of the required linkages and has indicated their interest in exploring this further. FISD is willing to help organize the discussion and act as a neutral facilitator of this activity. What’s needed is a strong indication of interest as well as ideas on:

• How to best leverage the existing proprietary schemes to provide a feasible route to creating identifiers for a significant proportion of entities.
• How responsibility for maintenance of the data, in particular corporate actions, can be assigned.
• How the service will be funded
• How responsibility for associating the Issuers with the Issues will be assigned (in conjunction with the National Numbering Agencies? As an offering from the ANNA Service Bureau?)