Financial-Firm Bar Codes Are Critical. Ask Your Corporate Clients

When the Group of 20 came together for the Leaders' Summit in Los Cabos, Mexico last month, they had important work on their plate. Not least was reaching agreement on the most efficient path toward a more transparent financial sector.  

Following the sector's collapse in 2008, there was much analysis about the triggers of the global financial crisis. This was followed by discussion about the ramifications for financial institutions, regulators, sovereigns, and Main Street. While much attention has been placed on financial institutions and their respective regulation, the impact on nonfinancial companies has been underappreciated. 

Nonfinancial companies are important market participants and customers in the financial sector. As users of financial instruments, corporate issuers from every other sector represent the origin of many financial products. 

We raise short- and long-term capital through debt and equity markets and we use derivatives to manage risk exposures to interest rates, foreign exchange fluctuations and commodity costs. Our participation in the financial markets is not speculative—it's an important risk management strategy to limit volatility from the variables in our industries. 

Following the failure of Lehman Brothers, the fallout for nonfinancial companies was immense. In the short term, some companies lost access to immediate credit as commercial paper markets froze, causing companies to borrow under their bank credit facilities. A run on the banks suddenly became a possibility.

With stock prices plummeting and consumer spending stalling, non-financial companies struggled. A problem that started in the financial markets led to a severe recession, and ultimately contributed to the failure of businesses in many other sectors.  

With this experience as a backdrop, it shouldn't be surprising that non-financial players are championing a more secure and transparent financial system. That transparency begins with the establishment of a "common language" for the financial sector via a global Legal Entity Identifier (LEI) system. 

Currently, the sector has no common language. As the Bank of England's Andrew Haldane highlighted, the sector has many proprietary, competing in-house languages with information silos. This fragmented system unnecessarily thwarts the ability of one institution to "speak" effectively to another when conducting transactions. To address this issue, an LEI would provide a unique number that identifies each entity, in essence a "license plate" number which would stay with that entity forever and be attached to every past, present, and future transaction.

The G20 has charged the Financial Stability Board with coordinating work among the global regulatory community on the global identification standards. The FSB issued a progress report prior to the G20 Summit where the board proposed a federated approach for the implementation of the system. 

Besides benefiting regulators and global trade, global identification standards will help companies in the financial sector measure and manage their own counterparty exposure while providing operational efficiencies and customer service improvements to the sector.

They will eliminate manual processes and reduce the time required to settle transactions, as well as increase the accuracy of matching data records. Lastly, faster transactions and greater accuracy will inevitably support better risk management and lower longer-term costs.

Establishing a common language between transacting parties has been well addressed in many other industries that operate on a global stage, particularly the consumer goods industry – the grandfather of global identification standards.