TechTalk Blog: Rebuilding Investor Confidence in the Capital Markets: Combining Legal Entity Identifiers (LEI) & XBRL Financial Statement Data Standards

By David Colgren posted 04-17-2015 09:34 AM

  

Great information in this article about the global expansion of Legal Entity Identifier (LEI) global data standard and its impact in providing both regulators and investors understanding about the relationship between entities and their exposure in the capital markets. With the financial crisis of 2008 - both regulators and investors were unable to understand the relationship between entities involved because these complex relationships could not be tracked to determine loss. Markets became frozen, millions lost jobs, economies stopped and workers around the world lost savings in their 401(k)s/ retirement plans.

What if we were able to link the global LEI data standard to the XBRL financial reporting data standard and combine both information data sets to provide even greater transparency between entities? Could this linkage provide additional transparency to help investors and help regulators mitigate systematic risk by making this information public and posted on the Internet for data consumption?

I would argue that by linking both data transparency standards -- we could create increased accountability as well as reduce the regulatory burden of reporting by public companies by having this information in a machine-readbale format posted on the Internet. Search engines and analytics programs could use this public data to analyze critical information driving investment in the capital markets. Like the Apple iphone - apps -- programs could be quickly developed using this free, open data housed in the cloud to provide unprecedented levels of disclosure to assist investors by allowing them to utilize actual data from company disclosure linked to the LEI data standard.    

Background  

There is no question that LEI data standard implementation is "off the launching pad" and quickly moving into the implementation stage. This global adoption effort is expanding very rapidly to include not only entity information – but transaction and financial instrument identification. In the US this standard is being mandated by the US SEC, Federal Reserve and CFTC and other regulators around the world.

But linking XBRL for financial statement information from each US public company to LEI we could provide even more transparency and accountability of public companies to rebuild confidence in the capital markets where it is so needed today. On the flip side, by linking both standards – regulators and capital market stakeholders will have all the critical information they need - thus reducing the number of regulatory reports that are being required.

Currently each public company in the United States is sending more than 15K – 20K+ financial statement XBRL data tags to the US SEC (which also includes valuable information regarding the companies footnotes).  In the XBRL Community -- we call this the “Company's financial DNA” that is now in a machine-readable data format posted on the Internet for immediate analysis by regulators and investors. This XBRL data tagged information is made available to the public by the US SEC via the US SEC EDGAR System company financial data repository so the public can have access. Today, more than 2/3 of the world’s capital markets are using the XBRL data standard for financial statement disclosure.

By linking this to the LEI global standard an additional layer of transparency and accountability will become available to help rebuild confidence to the capital markets. The article posts out that we are only at the beginning stages for LEI adoption. According to research released late last year by Tabb Group and Alacra, 17% of global banks have LEIs. In addition, 15% of entities with a credit rating and 14.5% of entities that are listed on global exchanges have LEIs. 

As Richard Berner, Director of the US Treasury Department’s Office of Financial Research says in this article: “The global LEI is the cornerstone for financial data standards. Had the LEI system been in place in 2008, the industry, regulators, and policymakers would have been better able to trace Lehman’s exposures and connections across the financial system.” Berner goes on to say – “The LEI system also generates efficiencies for financial companies in internal reporting and in collecting, cleaning, and aggregating data.”  

There is no question that by linking the LEI data standard to the XBRL data standard for financial reporting there is an opportunity to reduce regulatory burden of companies because most of the critical information that stakeholders need will be posted on the Internet in a data format that is machine-readable for instant analysis. Individual reports to regulators or stakeholders can be created pulling all or part of this information for analysis instead of the company having to take sections out and individually crafting reports.  Additional tagged data could also be posted by the company using XBRL such as sustainability information that countries across the world are mandating to deal with the growing climate change crisis.  

What do you think?  Do you support the linkage of LEI to XBRL data? Do we need to have global data standards that can be access off the Internet in a machine-readble format for analysis to help investors? 

Stay tuned for additional information on this topic.

 

 



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04-20-2015 09:35 AM

LEI is driven by global regulators today such as the SEC and the European Securities and Markets Authority mandating the use of the LEI within trade reporting and derivative transactions under EMIR. However, the real value comes to companies and the marketplace when LEI's is used internally to manage suppliers and internal systems for enhanced data governance. XBRL has never managed to make that leap to enhance data governance for companies internally and still seems more like a regulator drive for public disclosure. Imagine when companies start releasing all their external communication with an LEI and the markets can really get a holistic view of the companies and their suppliers including financials in XBRL for easy consumption. It will be interesting to watch innovation over the next few years. Great blog David !!!

04-17-2015 11:22 AM

Great article David. From a data science point of view, combining LEI and XBRL standards would be fantastic. Having a consistent hierarchy of business ownership greatly simplifies the automation of constructing financial (and fraud detection) models.
It is much easier than supervised learning to simply have an algo crawl through the SEC filings to find significant facts; and the more data we can link together the more powerful our predictive capacity.

04-17-2015 10:34 AM

Thanks David. I am intrigued by the potential of the Legal Entity Identifier in conjunction with other interactive data on investor confidence. (I have a 401(k) too!)