Risk, Data and the Barcodes of Finance

Journal of Financial Transformations, Vol. 45, April 2017

56 Pages Posted: 2 Jan 2015 Last revised: 13 Dec 2017

See all articles by Allan D. Grody

Allan D. Grody

Financial InterGroup; New York University (NYU) - Leonard N. Stern School of Business

Peter J. Hughes

Durham Business School - Centre for Banking, Institutions & Development

Date Written: September 28, 2015


Global interest in creating a unique, unambiguous and universal identification system for all financial market participants and the instruments and contracts they manufacture, trade, own and process has met with universal acceptance. For regulators these ‘Barcodes of Finance’ (the unique transaction identifier – UTI; unique product identifier – UPI; and the legal entity identifier – LEI) are expected to provide an automated means to observe enterprise risk across silos of businesses within each financial institution and systemic risk across the global financial system. For financial industry members it is expected to allow for straight-though-processing (STP) as the barcodes of commerce has done for the global supply chain of commercial and consumer trade.

However, there is much to be learned from the first instances of implementations of financial barcodes occurring in the swaps markets. Billions of transactions are sitting in swaps data repositories (SDRs) with no computerized means of accessing them for risk aggregation, this being the first objective for their use.

Praised initially by global standards setters as a transforming pillar of financial reform, regulators are already issuing a new set of public consultations on the financial barcode to reassess the starting point of the journey and the understanding that set regulatory compulsion as a necessary enabler. Regulators who are living through the first implementations of these identification schemes are expressing caution as documented in this paper. Other regulators are moving ahead, possibly unaware of difficulties that have arisen.

The intent of this research paper is to assess the current state of the design and implementation of the Barcodes of Finance, now in its sixth year, and to propose solutions for the known issues that have arisen. Also, by examining similar programs of global identification standards successfully implemented in other industries, the known issues may be resolved and yet unknown issues prevented.

Toward this end the authors propose improvements that include an emphasis on creation and validation of unique identifying information at-source along with self-assignment and self-registration of codes directly by legal entity registrants and product manufacturers. These are the methods successfully used in the barcodes found in global commerce and in the domain names of email and Web services. This approach contrasts with the after-the-fact methods financial supply chain data intermediaries now use to validate data and assign codes and associated reference data.

To assure uniqueness and the highest levels of data quality, trusted third party oversight of UTI construction algorithms and at-source “second eyes” certification of the legal entity identifier (LEI) and its associated reference data is recommended. The authors propose using auditors’ already existing third party assurance services toward this end. Further, auditors’ participation would add knowledge and professional judgment to facilitate the legal entities’ placement in their organizational hierarchy as trade counterparties and in their relationship as product manufacturers. These later requirements are the subject of two separate public consultations published in late summer, 2015 for consolidating legal entities based upon public company financial statement consolidation principles and for designing the UTI.

Critically, the LEI is now exclusively being assigned to swaps market participants, realizing only one tenth of the potential in support of all financial participants in all markets. The LEI system also lacks real-time updating and maintenance in an era where financial transactions are increasingly processed in real-time. To this end the authors make the case for real-time processing and virtual linkages of LEI registries as is the case with the Internet’s underlying technology architecture. Also the authors make the case for automating data aggregation by using the consolidating parent LEI as a prefix for all legal entities; for generating UTIs; and for designing the UPI. This approach had been proposed before for the LEI by regulators and industry, and is now included as an approach in a new proposal by regulators for the UTI. Finally, the LEI is in need of evaluation for fitness of purpose as it is proposed to be used as the linchpin for the construction of the UTI and possibly the UPI while already falling short on its earliest objectives for use in data aggregation.

Keywords: Risk Management, Data Management, Bar Codes, Identification Standards, LEI, Financial Stability Board

JEL Classification: E3, G2, L1, L86, O3

Suggested Citation

Grody, Allan D. and Hughes, Peter J., Risk, Data and the Barcodes of Finance (September 28, 2015). Journal of Financial Transformations, Vol. 45, April 2017, Available at SSRN: https://ssrn.com/abstract=2544356 or http://dx.doi.org/10.2139/ssrn.2544356

Allan D. Grody (Contact Author)

Financial InterGroup ( email )

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New York, NY 10012
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New York University (NYU) - Leonard N. Stern School of Business ( email )

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Peter J. Hughes

Durham Business School - Centre for Banking, Institutions & Development ( email )

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Durham, Durham DH1 3LB
United Kingdom

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