What is a Legal Entity Identifier (LEI)?
A Legal Entity Identifier or LEI Number is a 20-digit unique code defined by the ISO 17442 standard. An LEI number can be issued to companies and individuals who want to conduct financial transaction and trades. An LEI code contains information about an organisation’s structure and ownership, which enhances transparency in today’s marketplace.
A Short History of Legal Entity Identifiers
The need for trusted online communications has become apparent in this age of increased cybercrime and surveillance. Protecting online data is becoming the cornerstone of incoming regulations and LEIs are just one place that will help increase transparency and customer confidence.
Today, anyone can set-up a financial service and conduct business in the market without disclosing their associations and relationships with other companies. The Financial Conduct Authority (FCA) was set up with a mission to fix this very issue by introducing regulations that with make trading more transparent;
- before they happen,
- after they take place,
- and how they compare with the rest of the market.
In today’s landscape, a fund manager has no visibility as to why a broker chooses an exchange. They might not be getting the best deals because of this. And the exchange is not motivated to work for the fund manager, they have a relationship that benefits the broker.
The LEI system was developed in the 2011 G20 in response to the 2008 financial crisis. The Global Legal Entity Identifier Foundation (GLEIF) was set-up to support the task of global LEI adoption and the foundation is backed and overseen by the LEI Regulatory Oversight Committee or LEI ROC, a group financial regulators and central banks. The first LEIs were issued in December 2012 and at the time of writing this (September 2018) there are currently 1.2 million legal entities registered in 223 countries.
How Does a Legal Entity Identifier Work?
Who is Responsible for the Regulation Surrounding LEIs?
There are several parties involved in the adoption of LEI:
- European Banking Authority (EBA) – issued recommendations on the use of LEI
- Financial Stability Board (FSB) – set up at G20 as an international body that monitors and makes recommendations about the global financial system.
- Financial Conduct Authority (FCA) – the conduct regulator for 58,000 financial services firms and financial markets in the UK and the prudential regulator for over 18,000 of those firms.
- European Securities and Markets Authority (ESMA) – safeguards the stability of the European Union financial system by enhancing protection of investors and promoting stability.
- The Legal Entity Identifier Regulatory Oversight Committee (LEI ROC) – a group of 71 public authorities and 19 observers from more than 50 countries established in January 2013 to coordinate and oversee a worldwide framework of LEIs.
- The Global Legal Entity Identifier Foundation (GLEIF) – responsible for controlling local operating units.
- Local Operating Unit (LOU) – responsible for issuing and maintaining LEI codes in each region.
ISO 17442: The LEI Code Structure
A Legal Entity Identifier contains the following information:
- The official name of the legal entity.
- The registered address of the legal entity.
- The country of formation.
- The codes for the representation of names of countries and their subdivisions.
- The date of the first LEI assignment.
- The date of last update of the LEI information.
- The date of expiry.
LEI, ISO 17442 defines the minimum that should be included in each unique LEI number as:
- Characters 1-4 – the prefix used to identify the LOU who issued the LEI code.
- Characters 5-18 – the entity specific part of the code issued by the LOU according to ISO 17442.
- Characters 19-20 – check digits used to verify the LEI.
Do I Need a Legal Entity Identifier?
What Are the Benefits of Having an LEI?
For everyday businesses, obtaining a legal entity identifier or LEI number has several advantages.
- It can reduce the risk associated in financial transactions because you are more able to measure the risk and make informed decisions.
- Because the risks are easier to calculate, costs of information gathering and administration are kept low. You can also reduce the cost of various reporting such as out-of-court derivative transactions.
- You are enhancing market transparency.
These are great reasons to obtain an LEI number but some companies will need an LEI number to trade legally under certain regulations.
EU Regulations Governing the Issuance of LEIs
Because the Financial Conduct Authority (FCA) have worked together with the European Security Markets Authority (ESMA), the requirement to obtain Legal Entity Identifiers are entering a number of EU and UK regulations, many of which affect companies from all over the world if they wish to trade in the EU financial market. The regulations and directives all aim to increase market transparency and decrease market abuse to reduce the likelihood of another severe market crash like the one in 2008.
The European Banking Authority (EBA) finalised the technical standards on supervisory reporting which recommended that all competent authorities use a single identifier for each credit and financial institution. The recommendation supported adoption of LEIs proposed by the Financial Stability Board (FSB), who were established at the G20 in April 2009. These standards have been mentioned in several regulations. I’ll mention a few here but I intend to blog about some in more depth. If you wish to see a full list of regulations where obtaining an LEI number is a requirement, you can find a full table on the RapidLEI website.
The Markets in Financial Instruments Directive 2 (MiFID II)
In force from January 3rd, 2018, MiFID II will strengthen investor protection and improve the functioning of financial markets making them more efficient.
MiFID II hopes to extend MiFID with; new market structure and transparency requirements, new rules on research and inducements, new product governance for manufacturers and distributers of MiFID ‘products’ and an introduction of a harmonised commodity position limits.
Note: Our next post will go into more detail about MiFID II so make sure to sign up (link) and I’ll send you an email when it’s live.
European Markets Infrastructure Regulation (EMIR)
Aimed at any entities entering derivative contracts (including those not involved in financial services), EMIR requires every derivative contract is reported on a trade repository, risk management standards are implemented and that over-the-counter derivatives are cleared by a central counterparty.
Two obligations for parties when reporting derivatives are to include a Unique Transaction Identifier (UTI) and a Legal Entity Identifier (LEI).
Market Abuse Regulation (MAR)
MAR, which came into effect on July 3rd, 2016, wants to minimise market abuse by increasing the scope of offenses and introducing new offenses for firms operating inside the EU financial markets. MAR applies directly in each EU member state without requiring each member state to implement its own regulation. It covers areas such as;
- market manipulation,
- market surroundings,
- insider trading,
- unlawful disclosure and
- inside information.
MAR stipulates that manager’s transactions must now contain a Legal Entity Identifier code of the issuer.
Capital Requirements Regulation (CRR)
The CRR is one of two regulations (the other being the Capital Requirements Directive IV or CRD IV) that comprise the Capital Requirement Regulation or CRR. It is aimed at banks, building societies and investment firms and it sets out to be a single framework for strengthening the EU banking sector to better absorb economic shocks, allowing banks to continue activity and grow in a crisis.
While still new, the use of LEIs also has a place in the world of cybersecurity. In online transactions, there are always two actions which ensure confidentiality and integrity of communication.
- Encrypting communication – can be done with a digital certificate, for example, an SSL/TLS certificate.
- Identifying recipient – it’s no use encrypting communications between two parties if one of those parties turns out to be malicious, so we must also identify each other.
With the help of domain validated SSL/TLS certificates, it is becoming increasingly easy to do the first, but identifying who are communicating with is becoming increasingly hard as phishers trick consumers every day. Legal Entity Identifiers act as a digital passport for two entities conducting any financial transaction so it would make sense to use them in online transactions to identify parties.
Global adoption of LEIs within digital certificates could be one way of solving that and we’re excited to say that issuing an SSL/TLS certificate with an LEI code in the Organisation or OU field is already possible. Here’s an example from our own website.
If you’re interested in getting one yourself, let me know!
How to Obtain a Legal Entity Identifier (LEI)
LEIs can be bought through Local Operating Units or LOUs. Each Local Operating Unit, after being accredited by GLEIF, can sell LEIs at a price they chose. Many charge between £40 and £150 and take between 5 days and 5 hours to finalise the issuance of the LEI.
ManagedLEI is powered and operated by RapidLEI allowing us to issue your LEI code in a matter of minutes for a fraction of the cost. We can also help manage a large portfolio of LEIs, a useful service for larger firms and service providers who want to take away admin costs associated with LEI management and automate renewals.
Cristina is an experienced professional with a diverse career that has played to her strengths as a pragmatic, multilingual manager and educator with a passion for building trust through clarity and communication. Founding ManagedLEI was a natural step for Cristina as an intrepid entrepreneur and under the Trusted Identity banner she has many exciting plans for the future of ManagedLEI and it’s anticipated associated financial and digital security products and services.