Alternative Investments Have an Identity Problem

We all have IDs, or ways in which we can be identified, such as drivers licenses, passports, social security numbers, work or school ID cards, and more. Companies also have identifiers, such as Tax IDs or Employee Identification Numbers (EINs), which are necessary for various business-related tasks such as saving on sales tax, paying employees, and filing quarterly and annual tax filings. But alternative investments aren’t so easily identifiable.

How traditional investments are identified

In the public markets there are plenty of IDs for the various Debt and Equity securities that “trade.” Most people are familiar with stock tickers (e.g. AAPL, MSFT, KO). Additionally, there are a handful of identifiers (perhaps lesser known by “retail” investors), including ISIN, CUSIP, SEDOL, LEI, and more. 

• ISIN: (International Securities Identification Number): identifies securities that are traded and settled internationally.

• CUSIP: (Committee on Uniform Security Identification Purposes): identifies securities that are traded, cleared, and settled in North America, particularly in the United States.

• SEDOL: (Stock Exchange Daily Official List): serves as the National Securities Identifying Number for all securities issued in the United Kingdom, and are therefore part of the security’s ISIN as well.

Both ISIN and CUSIP contain check digits that are located at the end of the code. The ISIN check digit is derived by converting letters to numbers by adding their position in the alphabet to nine. In CUSIP, they are converted by assigning them their ordinal positions in the alphabet.

How alternative investments can adopt an identification standard

While public capital markets have various methods to identify securities, private capital markets are far behind. 

More recently, though, LEI Worldwide (an organization that helps organizations meet their regulatory requirements) is pushing to create a Legal Entity Identifier (LEI) based on International Organization for Standardization (ISO) standards. 

This would help investments stay in compliance with many of the new European Regulations, such as MiFID/2, MiFIR (legislative frameworks to strengthen investor protection and improve the functioning of financial markets). 

The LEI is made of 20 alphanumeric characters as shown below:

 

Source: LEI Worldwide

“The global LEI system (GLEIS) is the first global database providing unique identification information of legal entities participating in financial transactions all across the globe. The database forms an index of legal entities which is publicly accessible and completely free of charge to use.”

– LEI Worldwide

By adopting an existing standard, or creating a new one, investors can start tackling current issues around transparency, liquidity, pricing, provenance and ownership regarding alternative investments.

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