What is a Legal Entity Identifier (LEI)?
A Legal Entity Identifier (LEI) is a 20 digit alpha-numeric code used to uniquely identify a legal entity.
At present there are no means to unequivocally identify legal entities that participate in financial market transactions. At the SIFMA Tech Conference on 19 June 2013 Matthew Reed (Chief Counsel, OFR and former Chair of the Regulatory Oversight Committee (ROC) for the global Legal Entity Identifier (LEI)) highlighted that in the United States alone there are 14 banks named City National Bank and 147 banks with a variant of the name City National Bank.
Over the years, companies and authorities have created a variety of identifiers. These have either been product specific, limited in geographical extent, or are proprietary identifiers that are disparate, incomplete and do not offer a holistic view of the cross-border finance industry.
What is required is a single global identifier pertinent across all industry sectors and all asset classes which is exclusive to each legally distinct corporate entity and is persistent for the life of that entity regardless of any business or structural changes. Enter the Legal Entity Identifier (LEI).
Who will need a Legal Entity Identifier (LEI)?
The LEI ROC has previously stated that it believes the term “legal entities” for the purpose of obtaining LEIs should be broadly defined. ISO 177442:2012 states “the term ‘legal entities’ includes, but is not limited to, unique parties that are legally or financially responsible for the performance of financial transactions or have the legal right in their jurisdiction to enter independently into legal contracts, regardless of whether they are incorporated or constituted in some other way”. This means non-legal entities such as trusts and individuals acting in a business capacity should apply for LEIs. There is presently a consultation underway as to whether international branches, which are non-legal entities, should also be eligible for LEIs.
What are the benefits of the Legal Entity Identifier (LEI)?
- A Legal Entity Identifier (LEI) will offer you the ability to trade. It is now a regulatory requirement to possess one before trading in certain asset classes.
The ability to uniquely identify legal entities which in turn would:
- aid transaction processing;
- allow for accurate aggregation of positions, which is necessary for effective risk management and calculation of margin;
- assist in sales and due diligence (KYC, AML etc.), functions that depend on the unique identification of counterparties;
- aid compliance with Regulatory reforms, for example, the Dodd-Frank Act, EMIR, AIFMID, SEC Rule 613 and the associated Consolidated Audit Trail (CAT);
- aid Regulators analyze, research and assess the interconnectedness amongst firms and markets and aid the monitoring of market abuse.
What is the format of the Legal Entity Identifier (LEI)?
The international standard for the Legal Entity Identifier (LEI) is outlined in "ISO 17442:2012 Financial Services-Legal Entity Identifier (LEI)".
Originally the Legal Entity Identifier (LEI) was an unstructured 18-digit alphanumeric code with a 2 digit check character suffix as per "ISO IEC 7064:2003 Information technology -- Security techniques -- Check character systems".
Initially the Financial Stability Board (FSB) agreed that the code should be a unique dumb alphanumeric string and not incorporate any intentional embedded intelligence (such as a country reference) which could lead to the code becoming out of date.
However, after discussions with the Legal Entity Identifier (LEI) Private Sector Preparatory Group (PSPG), whose purpose is to prepare recommendations on governance and operational issues, the FSB Plenary added some structure to the number by including the Local Operating Unit code.