On May 28th, 2019, the Financial Stability Board (FSB) released a thematic review of Legal Entity Identifier (LEI) policy successes and gaps, and presented recommendations for improved cross-country and cross-sector implementation.
You may recall that an LEI is a unique, 20-character alphanumeric code assigned to a legally distinct entity that engages in financial transactions. This global legal identification system was developed with G20 support as a response to the 2008 financial crisis, which had illuminated the difficulty of quickly and accurately identifying counterparties across borders.
LEI Successes to Date
Since the FSB was tasked with building the LEI governance framework in 2011, 1.4 million entities in more than 200 countries have acquired an LEI. In their May 2019 review, the FSB has found adoption to be most successful when an LEI is required as part of an international standard-setting effort, as with over-the-counter (OTC) derivatives trading where adoption is close to 100% in some jurisdictions, or across multiple market segments within the same region, like the European Union.
The FSB also reaffirmed the substantial benefits that LEI adoption offers to both regulators and market participants. For regulators, LEI implementation enhances the ability to monitor and track market abuses across institutions, products and jurisdictions. Market participants benefit from greater analysis on a counterparty’s risks and exposure, as well as greater clarity on a counterparty’s complex group structure, before engaging in a transaction.
Gaps and Weaknesses
There is still much work to be done. Outside of the derivatives and securities markets, LEI adoption is too low to effectively support new industry/regulatory uses. Nor has coverage reached a tipping point where voluntary take-up by market participants could propel further adoption. The FSB notes that this has been particularly apparent in Japan:
“[I]n spite of efforts to raise awareness and promote LEI implementation, entities not subject to trade reporting generally had difficulties in recognizing the benefits of a broad adoption of the LEI.”
While LEIs have been issued to entities in over 200 countries to date, coverage is currently concentrated in Canada, the European Union and the United States. Additional efforts are needed to balance out LEI adoption across jurisdictions.
FSB Recommendations for Increased Adoption
Within its thematic review, the FSB identified a few primary obstacles limiting LEI adoption:
- Current business model does not clearly align the costs and benefits of LEI use for voluntary participants.
- Lack of LEI coverage for ‘Level 2’ data, which illustrates parent relationships for entities.
- Insufficient links between LEIs other identifiers, such as business registries.
In response to these issues, the FSB made the following recommendations to the LEI Regulatory Oversight Committee (ROC) and the Global Legal Entity Identifier Foundation (GLEIF):
- Lower the cost and administrative burdens of acquiring/maintaining an LEI in the current business model.
- Improve the data quality process to increase LEI data reliability and usability.
- Encourage voluntary adoption by working with both the industry and the public sector to raise awareness about LEI benefits.
- Enhance the scope and usability of Level 2 data.
Predicting the Future of the LEI
So what impacts might we expect as a result of this FSB review?
Let’s consult my crystal ball.
Lowering the costs for acquiring and maintaining an LEI is an interesting proposition, as it favors LEI provision by public sector Local Operating Units (LOUs), à la Spain’s government-run business and trade registries. I do anticipate pushback from private sector LOUs who have bottom line revenue concerns, especially with the added recommendation to improve the data and usability of the LEI. This would likely incur costs for technology systems development and enhancements.
Another interesting twist revolves around insufficient linkage to other identifiers, like business registries. In the early days, the idea was that an LEI would help companies report data to regulators and reduce the costs of cleaning data. Now, LOUs are encouraged to link to registries in order to confirm LEI-submitted data, rather than the other way around. This is spurring a practical change in the validation process. Instead of entity-supplied or partially corroborated validations (those that have not been compared against another identifier or registry), there is likely to be more ‘fully corroborated’ validations to come as LOUs link to other data. Here, my crystal ball sees a long-term opportunity to consolidate LEIs and registry IDs, depending on the flexibility of other registries.
Improving data quality and usability, specifically of Level 2 relationship data, will no doubt add to the relevance, value and increased use of the LEI. This should also drive improved coverage in more industry verticals and in geographical areas beyond Canada, the EU and the United States. More regulations mandating the use of the LEI may be on the horizon as more data fields focus in on parent company relationships. With greater adoption and coverage, expect to see LEI growth in areas such as payment messaging, digital authentication and ‘Know Your Customer’ (KYC) compliance.
As far as the future of the LEI concept, my crystal ball says that it’s here to stay and adoption will continue to grow as the framework evolves.
This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
