Bylined Articles

MiFID II’s “No LEI, No Trade” requirement mandates all entities trading with European counterparties across all asset classes to obtain legal entity identifiers. Industry sources estimate that the volume of registrations for LEIs may increase by 50% to 500% in the lead up to MiFID II implementation.

The upcoming implementation of the revised Markets in Financial Instruments Directive, or MiFID II, presents a significant compliance challenge for all firms already within the scope of MiFID and for many more that will fall under the mandate of the new and expanded iteration of the directive. Tasked with increasing safety and transparency of the European marketplace, MiFID II will significantly alter the way firms trade.

The “No LEI, No Trade” requirement is an important part of MiFID II. It mandates that as of January 3, 2018, all entities trading with European counterparties across all asset classes will be required to obtain legal entity identifiers (LEIs); store these in their reporting system; and have in place the necessary maintenance procedures ensuring LEIs are renewed on a timely basis.

Reporting with an LEI helps identify parties to transactions regardless of the broker-dealer or the entity that may be reporting to the regulator. For example, if a firm trades with three different broker-dealers, this firm will be reported with the same LEI, regardless of who is reporting, which helps regulators better understand and assess systemic risk, or whether there is any concentration of risk with any entity.

The global LEI framework was first put in place in 2012 as an integral part of derivatives reporting. It was intended to help address the challenges faced by financial institutions as well as regulators to identify complex relationships between securities and corporates issuing them. The system is managed by the Global Legal Entity Identifier Foundation (GLEIF), its administrative center. Approximately 30 LEI operating units (LOUs) are responsible for the allocation of LEIs. They issue LEIs, validate legal entity information, and maintain LEIs on behalf of the registrants.

511,000 LEIs have been issued over the past few years to financial institutions and corporates across the globe. DTCC’s subsidiary operating the Global Markets Entity Identifier utility (GMEI utility) – which continues to operate as the largest LEI issuer, by share of the total LEIs issued worldwide – has issued more than 247,000 LEIs to entities from more than 200 jurisdictions – this is three times more than the next largest LOU.

The MiFID II go-live next year represents a major shift in the way LEIs are used for regulatory reporting. As of January 3, for the first time, firms subject to MiFID II will require LEIs to report transactions across all asset classes, not just derivatives.

When the LEI framework was first introduced, the industry experienced a huge volume of last-minute registrations immediately prior to LEI rules coming into effect. It is highly likely this will happen again as we approach the January deadline, with industry sources estimating that the volume of registrations for LEIs may increase by 50% to 500% in the lead up to MiFID II implementation.

Currently, LOUs are making the necessary arrangements in order to ensure they are equipped to handle the predicted surge in LEI registrations. For example, DTCC is preparing to increase staffing during this period in order to be able to accommodate this anticipated increase in registrations. We are also considering ways to incentivize entities which will require an LEI for MiFID II reporting to obtain them well in advance of December 2017, rather than wait until the last minute. All LOUs are working closely with the GLEIF to determine the best way to raise awareness, making sure that the firms falling under the MiFID II mandate understand the requirement for LEIs as soon as is practically possible. The “No LEI, No Trade” requirement is unequivocal. With only seven months to go, firms that will be affected by MiFID II should obtain the relevant LEIs sooner rather than later in order to ensure they are well prepared for the transaction reporting requirements coming into effect in several months.

This article first appeared on TabbFORUM, June 19, 2017.