“No LEI, no trade” was a key facet of the Markets in Financial Instruments Directive II (MiFID II) rule implemented in July 2018 and has since become a common operating catchphrase for parties trading with European investment firms. MIFID II requires a Legal Entity Identifier (LEI) as a precondition for parties when a trade involves a European financial institution. The rule, given its extra-territorial implications, applies to buy- and sell-side firms that even operate wholly outside of the European Union (EU).
The LEI, first introduced in 2012 and endorsed by the G20 to uniquely, accurately and persistently identify all parties in a financial transaction, is a distinct, 20-digit alphanumeric identification code. With the LEI as a key reference data attribute, exposure can be aggregated and traced across the financial system – thereby reducing business risk and increasing greater market transparency. The LEI record also pinpoints the direct and ultimate parent of a given entity on a consolidated financial basis – to ensure that there is no ambiguity on entities, counterparties or group families that are involved in a financial transaction.
Improving Risk Management and Operational Efficiency
The creation of the LEI construction was one of the regulatory initiatives introduced to advance financial stability and increase resiliency in the financial system. Aside from providing regulators and firms with an accurate view of risk exposure across asset classes and multiple jurisdictions, the LEI has evolved beyond the regulatory mandate and is viewed as a way to increase operational efficiency.
Designed to be used as a unifying regulatory standard, the LEI is increasingly adopted globally. Many firms today are leveraging the LEI to passport cross border trades using a single identifier – uniquely distinguishing their counterparties instead of relying on multiple identifiers. The LEI as a key reference attribute has helped firms improve their internal risk management processes, collecting, standardizing, aggregating and reporting data while improving efficiency and reducing cost. This benefit is important in today’s context with LEI helping to decrease the touchpoints that transverse the trade lifecycle.
"The LEI as a key reference attribute has helped firms improve their internal risk management processes, collecting, standardizing, aggregating and reporting data while improving efficiency and reducing cost."
Promoting Greater LEI Usage
Despite its efficiency and benefits, the number of LEIs issued globally has only risen gradually from approximately 1.2 million in 2018 to close to 1.8 million today, based on statistics from the Global Legal Identifier Foundation (GLEIF). The moderate increase in LEIs issued can be attributed to absence of expansive regulatory mandate. Higher historical adoption has been observed in the US and Europe where the LEI is mandated for transaction reporting by local regulations. While Asia has lagged the rest of the world in LEI adoption at approximately 7.6% of the total LEIs issued, the take up rate has been increasing. This is due to the LEI requirement for OTC derivatives transactions reporting in markets like Australia, Hong Kong and Singapore and payment transactions in Malaysia, for example.
Supporting Regulatory and Sanction Requirements
DTCC’s GMEI Utility has issued over 450,000 LEIs across all ISO jurisdictions and is actively working with our clients to register and maintain LEIs for their subsidiaries and affiliates around the world. Beyond regulatory reporting requirements, the LEI when used in conjunction with standing settlement instructions (SSIs), can help bring surety to post-trade processing by seamlessly connecting transactions and counterparties across the trade lifecycle.
Additionally, when our clients upload their LEIs in DTCC’s ALERT®, the industry’s largest web-based global database for managing SSIs, they are able to use the stored LEI data to determine their exposure to an entity, as well as their aggregate exposure by parent.
The extensive LEI data stored in ALERT not only help to identify the counterparty or counterparties involved at the fund level, but also provide an accurate reading of counterparty risk. This functionality in ALERT is especially effective if an LEI is required to be attached to every trade to support regulatory requirements. For example, during Executive Orders when firms are prohibited from transacting in certain listed securities, the LEIs that are linked to the affected entities can automatically be traced to the listed securities from ALERT – enabling action to be taken.
In today’s evolving regulatory landscape, further adoption of the LEI as a critical data element is key to enabling efficiency and transparency in the financial markets – from institutions to regulators and policy makers. The LEI can only meet its original goal and design purpose if regulators from around the world align on mandating the LEI as a global standard for identifying legal entities involved in any financial transaction.