European Union: Legal Entity Identifier (LEI) - Solving The Mystery Of The New Regime

Last Updated: 7 February 2018
Article by Erika Vella

After the last financial crisis and, in particular, the collapse of Lehman Brothers in 2008, financial regulators and private sector managers found it difficult to uncover the network of participants connected. Consequently, this financial crisis revealed the need to identify financial connections and link data globally so as to make it easier for financial regulators and firms to understand and monitor the true nature of risk exposures. A better financial infrastructure was needed so as to bring about a unified and transparent global identification system for legal entities across markets and jurisdictions and increase the resilience of the financial market.

For this reason the G20 established the Financial Stability Board (FSB), a supra- national regulatory co-ordination body, whose job was to prepare recommendations for LEI governance and the implementation framework. The FSB defined a three-tier structure, consisting of a Regulatory Oversight Committee (ROC), a Central Operating Unit (COU) operated by the Global Legal Entity Foundation (GLEIF, www.gleif.org) and Local Operating Units (LOU).

The Financial Stability Board (FSB), with a secretariat in Basel, Switzerland, was set up to co-ordinate, at the international level, the work of national financial authorities and international standard-setting bodies in order to develop the implementation of effective regulatory, supervisory and other financial sector policies.

The Global LEI Foundation, overseen by the ROC, is the operational arm of the global system. The ROC is a group of 71 public authorities and observers from more than 50 countries and is the governing body which is responsible for the co-ordination of the world-wide framework of the LEI.

The Local Operating Units (LOUs) are the primary interfaces for anybody interested in registering for a LEI. LOUs manage registration, validation and implementation of LEI records. LOUs may have a variety of statuses and may be an entity conducting other activities such as a stock exchange or custodians. A list of LEI issuing organisations/LOUs may be found on: https://www.gleif.org/en/about-lei/how-to- get-an-lei-find-lei-issuing-organizations.

Regulation

The use of LEI numbers is already required under a number of European regulations such as:

  • The European Markets Infrastructure Regulation (EMIR) as from 1 November 2017 (the EU trade repositories are mandated to reject trade reports that do not contain an LEI irrespective of whether they pertain to the EU or non-EU
  • market participants);
  • The EU Regulation and Directive on Markets in Financial Instruments, commonly referred to as MiFIR and MiFID II;
  • The EU Market Abuse Regulation (MAR);
  • The EU Capital Requirements Regulation (CRR);
  • The EU Central Securities Depositories Regulation (CSDR);
  • The EU Transparency Directive;
  • The EU Alternative Investment Fund Managers Directive
  • The Swiss Financial Markets Infrastructure Act (FMIA);
  • The Swiss Financial Market Infrastructure Ordinance (FMIO).

The first LEI numbers were issued in 2012 and by mid-2017 the LEI's coverage amounted to over 500,000 entities from 200 different countries.

What is the LEI, who needs it and what are its effects?

A LEI is a 20-character, alpha-numeric code to uniquely identify legally distinct entities that engage in financial transactions. The LEI number is associated with reference data for each entity. It is not solely limited to the European Union and Switzerland, but is a global initiative. One may apply for a LEI code through any of the LOUs endorsed by the ROC in any country. A legal entity is therefore not limited to using a LOU in its own country and can choose to use the registration services of any LOU accredited and qualified to grant LEI registration. Registration for LEI number must be renewed annually.

The LEI number and data associated with it will be available free of charge to regulators and the public. The LEI number will allow financial supervisors to track global transactions and take action where necessary. An entity may transfer the maintenance of its LEI number from one LOU to another. To do so, the entity must contact the new LOU stating its already existing LEI number and providing any further documentation the new LOU may require. The new LOU will contact the retiring LOU. The LEI number will not be changed with this process. No fee should be charged by the retiring LOU for this transfer. The code never changes even if there is a change in the structure of the entity and an entity will have only one code which will be used everywhere in the world. Therefore data about an entity recorded in one dataset at one point in time will be the same data shown in another place at a different time. The LEI number has also become part of the Know Your Customer (KYC) and on-boarding process of financial institutions.

Failure to obtain a LEI number will result in non-compliance with regulatory requirements and prevent the entity from trading in securities. Essentially, every legal entity that is a party to a financial transaction and/or trades in derivatives must be registered for a LEI number.

November 2017

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