Regulators and financial firms have agreed for quite some time on the need for a global identification system. In response to a G20 request on this issue, the Financial Stability Board (FSB) published a report in 2012, “A Global Legal Entity Identifier for Financial Markets”, that detailed its recommendations for the creation of a unique identification system for parties involved in financial transactions. It laid the foundation for what is now known as a Legal Entity Identifier or the LEI.
Legal Entity Identifier – What is it?
An LEI is a unique 20-digit alphanumeric code based on the ISO 17442 standard assigned to legal entities. It connects to key reference information that enables clear and unique identification of legal entities participating in financial transactions. Simply put, the publicly available LEI data pool can be regarded as a global directory which greatly enhances transparency in the global marketplace. It provides much needed transparency for the benefit of users in both the private and public sector.
In November 2011, at the G-20 Cannes Summit, the G-20 mandated the FSB to implement a global Legal Entity Identifier (LEI) system to uniquely identify parties to financial transactions. The financial crisis of 2008 provided the impetus to develop this global LEI system, underscoring the need for a single entity code to enable transaction counterparties and regulators to analyze the monetary exposure and risk profile of counterparties. In the United States, Dodd-Frank mandated initiatives to create standard LEIs.
Oversight of the governance principles for the global LEI is completed through an FSB-sanctioned Regulatory Oversight Committee (ROC) comprised of more than 70 public authorities from more than 40 countries, including international regulators such as the International Organization of Securities Commissions (IOSCO), the FSB and the International Monetary Fund (IMF). Oversight of the issuance of LEIs is done by the Global Legal Entity Identifier Foundation (GLEIF), which is authorized by the FSB and headquartered in Zurich, Switzerland. The GLEIF is a not-for-profit organization overseen by the ROC to act as the operational arm of the Global LEI System and establishes rules and standards that each authorized entity (known as a Local Operating Unit, or LOU) must follow when issuing an LEI. There are currently 28 operational LOUs – all in competition with each other. As of the end of January 2016, over 415,000 entities from 195 countries had obtained LEIs.
Who Needs an LEI?
There are a number of regulatory mandates in place that require use of the LEI, including: swaps reporting regulations by the U.S. Commodities Futures Trading Commission and Securities Exchange Commission; the Investment Industry Regulatory Organization of Canada’s debt securities transaction reporting; and European Securities and Markets Authority Trade Reporting Regulation on Over the Counter derivatives, central counterparties and trade repositories (European Market Infrastructure Regulation). Regulators around the world in places such as Australia and Hong Kong have also embraced the LEI concept. A full list of LEI regulatory initiatives can be found here.
Registration and Maintenance
For entities that are required to have an LEI, the registration requires basic business card information (name, address, jurisdiction etc.). The record then undergoes a validation process, upon completion of which, an LEI is assigned. Once an LEI is assigned, your entity will be searchable to the public on the GLEIF and other sites run by LOUs. In addition, there is a maintenance component, whereby the entity should update their records when there are any changes and at least once a year.
How Does the Use of LEIs Benefit the Financial Industry?
If the LEI requirement sounds like a hassle, think of it this way: an LEI may ultimately lower your firm’s costs and improve risk management. An experienced service company can assist you with the required filings and annual renewals making it easier to ensure that you remain in compliance.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.