Identifying the importance of LEI
What is the Legal Entity Identifier (LEI)?
The LEI is a global standard for financial market participants. It applies worldwide and ensures more transparency in the capital markets.
What’s the background?
The financial crisis showed how difficult it was for banks and regulators to quickly and unequivocally clarify complex company networks. The global LEI system counteracts this: an LEI clearly identifies each contract partner or issuer of listed emissions and contributes to satisfactory mandatory disclosure to the supervisory and the ongoing transparency for the market participants.
Who needs an LEI, and by when?
All participating market legal entities that fall under the obligations of the European Market Infrastructure Regulation already need an LEI for their foreign exchange and derivatives business. With Mifid II and the Markets in Financial Instruments Regulation taking effect in January 2018, the circle of affected entities worldwide will enlarge dramatically.
At that point, the LEI will become applicable to:
- investment firms that execute transactions in financial instruments
- legal entities (buyers and sellers) on whose behalf the investment firm executes transactions
- issuers of any financial instrument listed and/or traded on a trading venue.
Does this affect only Europe?
No. These rules will mandate both EU and non-EU market participants to obtain an LEI. With Mifid II all legal entities need to provide their banks and/or transaction service providers with an active LEI: this covers a wide range of legal entities like offshore vehicles, trusts, pension schemes and issuers with securities that have a parallel listing of their securities on a trading venue under European Securities and Markets Authority (Esma) regulation.
In view of the regulation of the financial markets, it is to be expected that the use of the LEI will be assumed by many authorities and institutions worldwide.
What are the implications if my company doesn’t have an LEI?
Under the slogan ‘No LEI, No Trade’ Esma gets to the point: any business that wants to act within the financial markets and is a legal entity able to obtain a LEI will need one in order to trade.
Why should IROs be aware of this?
As IROs are naturally related to a legal entity that is active in the financial and capital markets – their company – the relevance of this topic is obvious.
How do you obtain an LEI and what does it cost?
There are three dozen issuing organizations out there certified as Local Operating Units to supply and renew LEIs. Most of them offer digital software to easily apply for an LEI. Depending on the issuing organization, the process takes one or a few days. Costs depend on the issuer as well.