When the revised Markets in Financial Instruments Directive (MiFID II) comes into effect from January 2018, all entities trading with European counterparties across all asset classes will be obliged to obtain legal entity identifiers (LEIs).
What is an LEI?
The UK's financial regulator, the Financial Conduct Authority (FCA), describes an LEI as a code, which provides “a unique identifier for persons that are legal entities or structures including companies, charities and trusts... This enables every legal entity or structure that is a party to a relevant financial transaction to be identified in any jurisdiction.”
The FCA's website also states: “If you are subject to MiFID II transaction reporting obligations or are a UK branch of a third-country firm, you will need to ensure that your clients eligible for an LEI have one before executing a transaction in a financial instrument subject to the MiFID II transaction reporting obligations on their behalf, from 3 January 2018. These financial instruments include shares, bonds, collective investment schemes, derivatives and emission allowances meeting the conditions in article 26 MiFIR.”
No LEI, no trade
The Depository Trust & Clearing Corporation (DTCC), through a subsidiary, runs one of the biggest LEI operating units (LOUs). The headline of this blog written by the DTCC's Ron Jordan spells out the situation clearly: “No LEI, no trade”. Financial institutions subject to MiFID II reporting requirements will have to use LEI codes for each client and include this information in transaction reporting. And it's clear that the LEI must be obtained before the trade is effected.
In the past few years, 511,000 LEIs have been issued to financial institutions and corporates across the globe. The framework for LEIs was put in place in 2012. The DTCC's Jordan writes: “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.” LEIs are allocated by about 30 LEI operating units (LOUs) and the system is managed from an administrative centre called the Global Legal Entity Identifier Foundation (GLEIF).
But obtaining an LEI shouldn't be seen only as a bureaucratic burden – there are also other benefits for companies and financial institutions. According to John Mason, of Thomson Reuters, using an LEI in financial trading improves risk management and transparency. He writes: “While LEI codes enable the unambiguous identification of entities, they also deliver a host of additional benefits relating to risk management, including, for example, improved transparency and visibility within global supply chains.”
Mason says that the adoption of MiFID II could double the number of LEIs in existence, adding that improving market transparency depends on a critical mass of LEI codes being issued. There is likely to be a rush to obtain LEIs before the 3 January deadline and companies should act now to ensure that LEIs are in place. The DTCC's Ron Jordan wrote that “the volume of registrations for LEIs may increase by 50% to 500% in the lead up to MiFID II implementation”. As well as obtaining the LEI, financial institutions will also have to ensure that they are able to store the LEIs in their reporting system and have the necessary maintenance procedures in place to ensure that LEIs are renewed on a timely basis.
However, many financial institutions aren't prepared. Mason adds: “Given this unfolding scenario and the fact that many institutions simply do not have a handle on which clients have LEI codes and which do not, many will turn to external providers for help.”
The DTCC's Jordan concludes in his blog (written in July this year): “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.”
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