A butterfly effect in the making

Christian VoigtIn a recent speech, Andrew Haldane (Executive Director, Bank of England) makes a strong and convincing case that the proposed global Legal Entity Identifier (LEI) and the Unique Product Identifier (UPI) will have the largest impact on the financial industry in the current regulatory overhaul. The LEI and UPI are introduced in a recent CPSS IOSCO paper on “OTC derivatives data reporting and aggregation requirements”. The LEI is nothing more than a standard reference code that would provide a universal method of identifying entities on a global scale, while the UPI is a standard reference code and classification system for any derivative.

Andrew Haldane argues that most problems today are simply due to the fact that the financial industry is a modern Babylon where too much information is lost in translation. Furthermore, language barriers lead to poor inventory management of risk and liquidity. Whilst Wal-Mart can see and manage its entire global supply chain at the push of a button, it takes banks several days to estimate risk exposure across their own balance sheet!  This must change. A common language can help firms and regulators to manage the global chain of risk and liquidity more efficiently, resulting in a more stable and efficient system overall. So a small change in identifiers could make a very large difference on a global scale.

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