Investment companies can look forward to increased visibility throughout the trading workflow in the coming months. Challenges remain on how data is processed and managed but technology will provide the answers. The upcoming MiFID II regulations will increase the role of Legal Entity Identifiers (LEI) in the trading workflow. MiFID II requires that all entities need to be able to identify each other using a LEI. Essentially that means no LEI, no trade.

Existing trading and portfolio management systems should be able to handle aspects of this process with relative ease; just add on a new field for each broker or client account, for example, that can store the LEI. However that may not be the end of the challenge.

We know that the Global Legal Entity Identifier Foundation (GLEIF) estimates that more than half a million LEI have been issued, and keeping tabs on the LEI can be a task in itself. Many financial organisations use internal routing in order to facilitate trading and settlement. Therefore, it is possible that a buy-side firm executes with one LEI of a sell-side firm and settles with a related LEI.

For some firms this may present no challenges at all. However, if for years the trade has been booked against the settlement LEI because the instructions were correct to facilitate this settlement, how does a system that needs to record the LEI of the execution then handle this challenge of settlement if the instructions do not relate to the execution LEI? Can the sell-side routing of trades be reflected by the buy-side? This is something that prime brokers have been attempting to solve for some time, but the custodian set-up is more rigid.

MiFID II Offers Chance To Reboot

MiFID II presents the perfect opportunity to clean up all that static data to assess with whom you are truly executing. If firms validate the actual trading LEI and execution delegations against the broker agreements then how many gaps will be found? How many agreements are incorrect?

Multilateral trading facilities (MTFs) will force some of this data to be cleansed. They need to ensure they know exactly who is utilising LEIs and that will be solved with new agreements. Again, how many mismatches of the trading entities that face each other will be highlighted by this process?

Time For A Rethink On Workflow Processes

The good news is that there are opportunities. GLEIF provides an Application Programmer Interface (API), which first of all means that there should be an automated way to ensure that whoever you are trading with has a valid LEI. In May 2017, GLEIF also published level 2 data for entities, including the parent/child relationships between entities. In addition, improved credit risk data could be analysed since you can find an up-to-date view on firms you are dealing with.

What are you likely to need? Definitely, your system must enable you to capture the executing LEI and quite probably the settlement LEI. Also, you’ll need a data clean-up and review process, if you dare look at those broker agreements. MiFID II provides both challenges and opportunities. Organisations will need to rethink the way they process trades in the wake of MiFID II but with the right technology in place they can truly take control of their data, costs and productivity.