CORPORATE TRANSACTIONS & COMPLIANCE BLOG

Use of the Legal Entity Identifier (LEI) for Financial Transactions Continues to Grow

By: Karen Redman, COGENCY GLOBAL INC. on Thu, Aug 30, 2018
Increasing Transparency Through Legal Entity Identifiers (LEIs)

Much has changed since our October 2016 introduction to the Legal Entity Identifier (LEI).1 For the unfamiliar, an LEI is a unique alphanumerical identifier designed to address 3 key questions:

  • Who is who?
  • Who owns whom?
  • Who owns what?
Building a shared understanding of entities and ownership that promotes increased transparency in the financial sector, the use of LEIs allows transacting parties and financial institutions to better evaluate their level of risk and exposure in a given transaction.

Increased Information Collection

Initially, data collected about entities obtaining an LEI encompassed ‘Level 1’ or ‘business card’ information (e.g. official name of the legal entity, address of its headquarters), moving up to ‘Level 2’ data regarding relationships among entities in 2016.2

As of January 2018, all Local Operating Units (LOUs), or recognized service providers which issue and maintain LEIs, are required to report names, addresses, domestic jurisdiction and the registry ID of an entity’s “ultimate accounting consolidating parent” or its “direct accounting consolidating parent”.2 Using LEIs to identify these highest level legal entities that prepare consolidated financial statements for a given entity allows for risk aggregation and in so doing, provides transacting parties a more complete risk picture.

Growth in LEI Issuance

Going into 2017, less than 500,000 LEIs had been issued to date. According to the Global Legal Entity Identifier Foundation (GLEIF), nearly 1.2 million LEIs have been issued as June 2018.3 While there was a significant drop in the number of LEIs issued from the first to second quarter of 2018 – approximately 71,300 LEIs were issued in Q2 compared to 167,000 in Q1 – there remains an overall issuance increase of 6.3%. 

There are some significant regulations underpinning this increased use of LEIs. The European Union (EU) revised Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR), effective January 2018, obligates investment firms to identify all of their clients who are legal persons with an LEI before providing any services that may trigger transaction reporting requirements.4

Another impactful development regarding the use of LEIs came out of the Reserve Bank of India (RBI). In November 2017, the RBI directed its banks to not lend to large corporate borrowers unless those borrowers first obtained an LEI.5 This protocol will extend to smaller corporate borrowers by the end of 2019.

Expanded Application of LEIs

Noise is now being made with respect to having an LEI for all EU regulatory purposes. In June 2018, Executive Director of the European Securities and Markets Authority (ESMA) Verena Ross emphasized, “While it requires some efforts at the beginning, the consistent use of the LEI across the various EU requirements also generates tangible benefits to the industry by reducing operational complexities, and, ultimately, decreasing compliance costs. Many stakeholders are now calling for the LEI to be the standard pan-European identifier that can be used for all regulatory purposes.”6

India also faces expanded use of LEIs on the horizon. In April 2018, the RBI announced that it will implement the LEI mechanism for all financial market transactions undertaken by non-individuals in interest rate, currency or credit markets regulated by RBI to improve transparency in financial markets.7

That said, LEI implementation is not limited to the EU and India. Although concentrated to the EU or U.S., GLEIF reports over 130 regulatory activities worldwide that now include the use of LEIs as of July 2018.8

Other Uses for the LEI

Building a Better Picture of ClientsAs the LEI becomes the universal method and the global standard bearer of identifying legal entities, financial institutions are asking the question as to how much value the LEI has for their own customer on-boarding.

To that end, GLEIF has undertaken research with specialist research agency out of London to identify the key challenges of legal entity identification in financial services. In May 2018, GLEIF published A New Future for Legal Entity Identification on the challenges of entity identification in financial services, including ‘know your customer’ (KYC) due diligence.9 Ultimately, the report concluded that banks and businesses can gain greater transparency and work in a more streamlined fashion by adopting an LEI for each client organization.

Advocates of the LEI

In addition to ESMA’s Verena Ross (as quoted earlier), there are many other advocates of this global entity identifier. In May 2018, JP Morgan Chase published Data Standardization – A Call to Action, a regulatory insight paper setting out the case for the LEI and strongly endorsing its use.10 In a June 2018 speech, the Governor of the Bank of England described the LEI as the “best corporate identifier”.11

Last – and certainly not least – the International Chamber of Commerce (ICC) is also a champion of the LEI. In Euromoney’s Trade Finance Survey 2018, the ICC stated that “[W]e have encouraged the UN to support us in lobbying to make LEIs mandatory across the world. We believe this would be a game-changer in reducing the operational costs of KYC compliance”.12

Amidst all this advocacy for the further adoption of the LEI and additional regulatory activities involving the use of LEIs being implemented worldwide, it is apparent that the demand for global legal identifiers will only continue to increase.

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice. 

Topics: International Corporate Services, Corporate Transparency