US LEI proposal for commodity pools panned by global authority for not going far enough

A US proposal to require the use of legal entity identifiers by investment companies that trade swaps doesn’t open a big enough window on these commodity pools’ potential impact on financial stability, the global promoter of the identification tags said.

The Global Legal Entity Identifier Foundation said the US Commodity Futures Trading Commission should require all commodity pools that report to it, not just those that trade derivatives, to adopt the 20-digit codes.

The 1,303 commodity pools that report to the CFTC — including JPMorgan Chase, UBS, Wells Fargo, T. Rowe Price and D.E. Shaw — also can be used to trade futures and options in foreign exchange contracts or futures, or invest in another pools.

“Limiting the LEI requirement to only those entities that have an LEI due to their swap activity would restrict the commission’s ability to gather granular, pool-specific data and hinder the commission’s understanding of the role these pools play in the markets,” the foundation’s letter said.

The letter by GLEIF, which was created after the 2008 financial crisis by the international Financial Stability Board, echoed criticism of the proposal by Democratic CFTC member Dan Berkovitz.

“The commission can and should do more to integrate and analyze all of the data at its disposal,” he said in May when the proposal was issued for public feedback.

Commodity pools are operated by an individual or organization — including banks, mutual funds and hedge funds — that solicits funds for the pool.

— Failed form —

In 2012, the CFTC adopted a form for commodity pool operators, or CPOs, to file to help the agency monitor trends, a pool’s exposure to asset classes, and a pool’s susceptibility to collapse during stress.

But the pools were allowed flexibility in their calculations, making CPO comparisons difficult, and were permitted to file only quarterly and annually.

“It has become apparent that the disparate, infrequent and delayed nature of CPO reporting has made it difficult to assess the impact of CPOs and their operated pools on markets,” CFTC Chairman Heath Tarbert said last month.

The proposal would require CPOs that trade swaps to adopt the 20-digit entity identifiers that function as financial barcodes.

Tarbert said the lack of LEI information for CPOs and their pools has made it “challenging” to align the data collected on the form with data provided by other market participants.

“As a result, we cannot always get a full picture of what is happening in the markets we regulate,” he said.

— LEI effort flagging —

Authorities’ worldwide effort to get firms to adopt LEIs has flagged in the last year or two, especially in the US.

Firms’ issuance of LEIs rose 15 percent to 1.5 million worldwide at the end of December versus the year before. That was the smallest percentage and numerical increase in recent years.

Global authorities last year had set a goal of 40 million LEIs to help tally banks and asset managers’ overall risk exposure.