With the implementation from 3 January 2018 of EU Directive 2014/65/EU on markets in financial instruments (MiFID II) and accompanying Regulation (EU) No 600/2014 (MiFIR), additional requirements have been introduced on certain entities regulated under MiFID II/MiFIR to collect and report LEIs of their clients in certain circumstances.
What is a LEI?
A Legal Entity Identifier (LEI) is a 20-digit, alphanumeric code that allows for the clear and unique identification of legal entities participating in financial transactions. LEIs are used widely within the global and the European regulatory regimes for financial services, as they provide for an effective and reliable database for identifying parties to financial transactions.
What (or who) is a 'legal entity' for LEI purposes?
The European Securities and Markets Authority (ESMA) in a briefing on LEIs issued on 9 October 2017 (ESMA Briefing Note) clarifies that for the purposes of obtaining a 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 jurisdiction to enter independently into legal contracts, regardless of whether they are incorporated or constituted in some other way e.g. trust, partnership, contractual. It excludes natural persons, but includes individuals acting in a business capacity. It also includes governmental organisations and supranationals."
Why obtain a LEI?
LEIs are typically collected by regulated persons for the purposes of complying with their regulatory reporting requirements within the financial services regime. The most recent and significant expansion to the requirement on entities, including Cypriot entities, to obtain LEIs has resulted from the application of MiFID II and MiFIR.
As noted in the ESMA Briefing Note, the common framework enabled by the use of LEIs is "crucial to identifying clearly each exposure for risk management of financial transactions, to create transparency, and conduct market surveillance".1
Beyond MiFID/MiFIR, the LEI is an important characteristic in key European financial services regimes as implemented in Cyprus and across the EU, such as:
- Alternative Investment Fund Managers Directive (AIFMD): funds and fund managers Solvency II: pension funds and insurance companies
- Transparency Directive: issuers of financial instruments listed on Regulated Markets
- European Markets Infrastructure Regulation (EMIR): counterparties to derivatives contracts as well as beneficiaries, brokers, CCPs and clearing members
- Market Abuse Regulation (MAR): issuers of financial instruments; entities involved or reporting in suspicious transactions
- Capital Requirements Regulation (CRR): credit and financial institutions
- Credit Rating Agencies Regulation (CRAR): credit rating agencies and rated entities
- Central Securities Depositories Regulation (CSDR): CSDs, CSDs' participants
- Securities Financing Transactions Regulation (SFTR): parties involved in securities financing transactions and the beneficiaries of the rights and obligations arising from these
- Prospectus Regulation – issuers of securities offered to the public or admitted to trading on a regulated market situated or operating within an EU member state.
What is the relevance of LEIs in Cyprus?
Cyprus has given full effect to MiFID II through the enactment of the Investment Services and Investment Activities and Regulated Markets Law 2017 (the IS Law), which came into force on 3 January 2018. The new local legislation repeals and recasts the vast majority of rules contained in the Investment Services and Investment Activities and Regulated Markets Law 2007 which implemented Directive 2004/39/EC on markets in financial instruments (MiFID).
The IS Law together with MiFIR constitute the core of the new regime. MiFIR, as a European regulation, is directly applicable in Cyprus from the same date as MiFID II and is not further implemented under the new IS Law. For an overview of the MiFID II regime as implemented in Cyprus, please refer to our article here.
In particular, MiFIR introduces the following requirements for entities to be identifiable by a LEI:
- Investment firms that execute transactions in financial instruments
- The clients (buyer, seller) on whose behalf the investment firm executes transactions, when the client is a legal entity
- The client of the investment firm on whose behalf the trading venue is reporting under Article 26(5) of MiFIR, when the client is a legal entity
- The person who makes the decision to acquire the financial instrument, when this person is a legal entity (for example, this includes investment managers acting under a discretionary mandate on behalf of its underlying clients)
- The investment firm transmitting the order
- The entity submitting a transaction report (ie trading venue, approved reporting mechanism (ARM), investment firm)
- The issuer of any financial instrument listed and/or traded on a trading venue
Accordingly, in the ESMA Briefing Note, ESMA emphasises that investment firms reporting under Article 26 of MiFIR should have appropriate arrangements in place in order to collect and verify the LEI of their clients before the transaction takes place. In turn, operators of trading venues reporting under Article 27 must have appropriate arrangements in place in order to collect and verify the LEI of the issuer of the financial instrument admitted to trading or traded on its venue.
Both investment firms and operators of trading venues must ensure that the length and construct of the code are compliant with the ISO 17442 standard, that the code is included in the Global LEI database and that it pertains to the client concerned.
Further considerations for Cypriot issuers
On 20 September 2017 the Cyprus Securities and Exchange Commission (CySEC), which is the competent authority in Cyprus regarding the implementation of MiFID II and MiFIR, released Circular C2372 (Circular) on the acquisition of a LEI. The Circular is addressed to Cypriot issuers, these being issuers of financial instruments traded on a trading venue (ie a regulated market, a multilateral trading facility, or an organised trading facility). The Circular also discusses the circumstances under which systematic internalisers are required to obtain the LEI of issuers of financial instruments traded on their platform, in particular in relation to:
- Financial instruments where the underlying is financial instrument traded on a trading venue.
- Financial instruments where the underlying is an index or a basket composed of financial instruments traded on a trading venue.
The Circular also provides details on the procedure for obtaining a LEI through the Cyprus Stock Exchange, and further informs trading venues and systematic internalisers of the LEI 'Registration Agent' tool introduced by the GLEIF, which can be used by the regulated entities to guide issuers through the procedure to obtain a LEI.
Obtaining a LEI: The Harneys solution
Given the increasing importance of the LEI for our clients, Harneys have put together a team ready to meet your LEI requirements. From LEI initial registration, amendments and annual renewals, our LEI team is available to guide you through the process.
The LEI is becoming a key characteristic of the financial services regime in Cyprus, and it can be expected that its use will only increase. With respect to the new requirements introduced under MiFIR, Cypriot issuers should ensure that they obtain a LEI where needed in a timely manner, in order to avoid any disruptions in trading. In turn, Cypriot entities regulated under MiFID II should ensure that they have in place the necessary systems to be able to collect and report the LEI of the relevant entities as necessary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.