The Legal Entity Identifier (“LEI”) emerged in the wake of the financial crisis of 2008. Regulators cited the failure of risk management and controls as having played a leading role in the disaster. Of particular concern was the inability of virtually every institution to identify exposure to Lehman Brothers, Bear Stearns and AIG. In response, governments have focused attention on developing macroeconomic tools to monitor systemic risk [1] .
The 20-character alphanumeric code, known as the LEI, is a product of such an effort.
This newsletter aims to provide answers to the most frequently asked questions regarding the LEI.
1. What is an LEI number?
The LEI is a 20-digit, alphanumeric code, based on the ISO standard 17442 that enables clear and unique identification of companies and collective investment schemes participating in global financial markets. An initial registration fee and an annual maintenance fee must be paid to a duly authorised LEI issuing organisation [2] by any companies that apply for an LEI.
2. Who is entitled to have an LEI?
The term “legal entity” includes, but is not limited to, unique parties that are legally or financially responsible for the performance of financial transactions or have the legal right in their own jurisdiction to enter independently into legal contracts, regardless of whether they are incorporated or constituted in some other way (e.g. trust, partnership or otherwise contractually) [3] . While a natural person cannot apply for an LEI [4] , one may be assigned to governmental and supranational organisations.
It is important to distinguish between being eligible for an LEI and being required to have one. As defined in ISO standard 17442, any parties that carry out financial transactions or conclude contracts are eligible for an LEI. However, national and international financial regulators will determine which legal entities require an LEI.
3. Who must have an LEI?
Switzerland’s Financial Market Supervisory Authority and supranational authorities are authorised to set down requirements for which legal entities require an LEI. Today, LEIs are mainly required in the United States as part of the Dodd-Frank Act and are also required in European Union states in the framework of requirements imposed by the European Market Infrastructure Regulation (EMIR) or the Alternative Investment Fund Managers Directive (AIFMD).
Moreover, according to the Market in Financial Instruments Regulation (MiFIR), which came into force on 3 January 2018, any financial service providers that deal with certain financial instruments must report all the relevant details of their business to the competent authorities. In such cases, the LEI will be provided and used to identify clients [5] . Pursuant to article 27 MiFIR, trading venues in the EU are also required to use the LEI when reporting reference data. Swiss entities that issue financial instruments in the EU (or who is planning to do so in the near future) must also, by extension, apply for an LEI.
4. What kind of information is identifiable with an LEI?
The LEI connects to key reference information that enables clear and unique identification of legal entities participating in financial transactions. The LEI system is designed to ultimately answer the three following basic questions:
Level 1: Who is who?
Level 2: Who owns whom?
Level 3: Who owns what?
The information available with the LEI data to date is limited to answer the question of Level 1 that refers to the official name of a legal entity and its registered address. It provides the answer to the question of “who is who”.
Since May 2017, the process of enhancing the LEI data pool with Level 2 data, which answers the question of “who owns whom”, has been ongoing and is almost complete. The Level 2 data allows the identification of the direct and ultimate parents of a legal entity and, vice versa, in order for the entities owned by individual companies to be searched. In other words, the LEI system aims to provide more and more information on the registered legal entities.
5. Is the LEI data publicly available?
Yes. LEI data provides information, updated daily, on all LEIs used to date. Any interested party can easily access and search the complete LEI data pool free of charge on the Global Legal Entity Identifier Foundation (GLEIF) website.
6. Is an LEI the same for all financial instrument classes (bond, mortgages, etc.)?
Yes. LEI is not an identifier for instruments but a unique identifier of a certain legal entity. Therefore, a company uses its LEI to report all the financial transactions into which it enters, regardless of the financial instrument class or when the specific instrument has been issued.
7. Conclusion
The LEI system will provide more transparency to regulators and will also improve internal data flow and risk monitoring processes which in turn should allow the industry to meet regulatory reporting requirements while minimising costs.
To date, more and more companies are integrating LEIs into their systems and process. For instance, all Swiss companies that transact business with EU financial instruments will need an LEI [6] . In addition, any Swiss companies that issue financial instruments (e.g. stocks, bonds) will also need an LEI in order to ensure all applicable reference data can be reported in the EU. Given that the LEI operational and governance models are not yet fully finalised and the LEI is still in development, many companies lack guidance on where to begin. lecocqassociate is working with clients to consider these challenges.
There is no doubt that LEI will be an invaluable component in the global data supply chain.
