Legal Entity Identifiers (LEI) - who, what and whyMay 1, 2018,
by Seán Dennison - Category: Financial Services
When the world’s fourth-largest investment bank, Lehman Brothers, collapsed in 2008 it sparked a global financial crisis.
Origin of Legal Entity Identifiers (LEI)
The crisis triggered regulators and capital market participants to quickly assess the damage, to understand the likely effect and to know what other institutions might be exposed. However, it soon became clear that an assessment of the extent of market participants’ exposure to the bank and each of its hundreds of subsidiaries would not be an easy task.
Lehman Brothers transacted business through a maze of affiliate and subsidiary legal entities and there was no easy way to uniquely identify one from another. Consequently, financial regulators and market participants found it impossible to reliably assess counter-parties’ exposure to Lehman entities and to each other. The financial crisis thus exposed the critical need for a system to identify and understand exposures at the legal-entity level instead of the aggregate, parent-company level.
Soon after the onset of the financial crisis, leaders of the Group of 20 (G20), the Financial Stability Board (FSB), and central bank governors recognised the need for a universal system to identify legally distinct entities.
In November 2011 the G20 called upon the FSB to take the lead in developing recommendations for a global Legal Entity Identifier (LEI) and supporting governance structure. Based on recommendations developed by the FSB, market authorities worked with private-sector entities, including significant contributions from GS1, to create the Global Legal Entity Identifier System (GLEIS), which serves as a publicly available, global directory of legal entities.
Endorsing the FSB recommendations, the G20 spoke of their desire to "encourage global adoption of the LEI to support authorities and market participants in identifying and managing financial risks.”
The LEI Regulatory Oversight Committee (LEI ROC) was established in January 2013. The Global Legal Entity Identifier Foundation (GLEIF), a not-for-profit organisation created to support the implementation and use of the LEI, was established by the ROC and held its initial board meeting in June 2014. GLEIF provides accreditation to Local Operating Units (LOUs) who in turn partner with Registration Agents in different territories to support local LEI issuance.”
GS1 Global Office (from 1 June 2018) is an LOU and GS1 Ireland is a Registration Agent for the territory of Ireland.
What is an LEI?
The LEI is a 20-character, alphanumeric code, which uniquely identifies legal entities participating in transactions worldwide. The LEI is an index to the data held in the GLEIS database. The database contains information about an entity name(s), ownership structure and thus answers the questions “who is who” and “who owns whom” among market participants.
Applicants for LEIs provide information from the company registration agency (in Ireland this will usually be the Company Registration Office (CRO), the Register of Friendly Societies, the Charities Register, or one of the Central Bank of Ireland registers), together with their current address and ownership structure including parent companies and ultimate parent, if any.
LEIs are issued for a 12-month period after which they must be renewed annually. Applicants are free to use any LOU or their Registration Agents for initial applications and any subsequent renewals. They are free to transfer the LEI to a different LOU at any time and at no cost. The cost of an LEI varies significantly among Registration Agents/LOUs - GS1 Ireland’s rates are very competitive.
Who needs an LEI?
Regulators are mandating that capital market participants who trade over-the-counter derivatives need to have an LEI so that transactions are accurately reported back to the regulators. However, it is likely that regulators and financial institution will extend the requirement to have an LEI to other categories of traders. For example, banks can use them to issue loans, and corporations can use them to verify the identities of their sellers, suppliers, and other counter-parties.
LEIs are mandated for certain types of traders from January 3rd 2018.
GS1 Ireland as Registration Agent on behalf of GS1 Global Office
GS1 became a GLEIF accredited Local Operating Unit (LOU) in 2017 for the global allocation of LEIs, with country MOs to become "Registration Agents" to support LEI issuance locally. GS1 Ireland was one of the first MOs to go through the certification process and became a Registration Agent in early January 2018.
GS1 has several advantages as an LEI issuer. The organisation has a proven track record in managing and issuing unique identifiers, local knowledge in each country including language, familiarity with registration agencies, etc. As a global operator, GS1 can facilitate the LEI application process for companies with multi-national subsidiaries. GS1 can also handle bulk applications from service providers such as banks and accounting firms. GS1 Ireland already "certify" applicants for GS1 membership by checking records such as the CRO registration. GS1 can therefore meet the high data quality requirements imposed by GLEIF while providing a local, fast turn-around at a lower cost when compared to competitors. For GS1 members, we can offer a one-stop shop for GS1 identifiers, standardised solutions and LEIs.
The LEI Issuance Process
When an entity (company, fund, etc.) decides that they need an LEI, they click on the "Apply for an LEI" link on the GS1 Ireland website which will bring them to the LEI Direct website hosted on behalf of GS1 Global office. There they first need to register as a user (if not already one) and then they can complete the LEI application form. Information requested includes the official company name and address, company registration number and details of parent company (if any). Once completed, the application is validated against the public records by GS1 Ireland. Missing or incorrect information will be challenged and, once corrected, an LEI will be issued and payment made. LEIs must be renewed each year through the same validation process to ensure that the information stays accurate and current.
Future for LEIs
The FSB emphasised that global adoption of the LEI underpins multiple “financial stability objectives” and also offers “many benefits to the private sector”. Current identification and verification processes have significant manual components and often require the use of multiple databases in which a counter-party may be identified by different codes and different names. One large bank found that it had an average of five names in its database for each organisation.
Clearly there are significant data quality benefits from using LEIs within an organisation. These benefits will be multiplied when LEIs are used more widely - among organisations and across business sectors. LEIs create business value by reducing transactional and operational friction in the identification of transaction counter-parties. They also make important information about the background of a legal entity more readily accessible and traceable. McKinsey has estimated savings from the use of LEIs to be of the order of 10% of total operating costs for client on-boarding and trading processing for banks - so total savings in the banking system could be more than $650m per annum. The combination of savings, improved data quality and reduced risk will be too tempting for institutions to resist.
Since the establishment of the LEI system, a series of regulatory initiatives have urged - and in some cases required - market participants to adopt unique, cross-industry legal entity identifiers. These initiatives have included the Dodd-Frank Act in the United States and the EU "Markets in Financial Instruments Directive" (MiFID II) and Regulation (MiFIR). The latter two are in force as of 03/01/2018. While these are driving LEI adoption, operational efficiencies, cost savings, reduction in transaction times and more reliable information are likely to drive adoption in the near future. As one example, the Reserve Bank of India have mandated that all corporate borrowers with exposures greater than about €6m are required to have an LEI. It is likely that this requirement will spread beyond India and that the threshold will be reduced. GS1 is ideally placed to help with the anticipated increase in LEI applications.
Our website has a lot more useful information - including how to apply for one - and links to other informative sites. The GLEIF website has information and tools to search for LEIs.
McKinsey & Company and GEIFF, October 2017, The Legal Entity Identifier: The Value of the Unique Counterparty ID
GLEIF website, https://www.gleif.org/en/about/history
GS1 Global LEI Service, Registration Agent Training, Cologne, November 2017, (two volumes)
Reserve Bank of India, Circular RBI/2017-18/82 DBR.No.BP.BC.92/21.04.048/2017-18Tags: lei, legal, entity, identifier,