The Legal Entity Identifier (LEI) is an alpha-numeric code consisting of 20 characters and is based on the ISO 17442 assigned to entities participating in international financial transactions. It connects to an entity’s essential information, such as ownership and structure. An LEI code can only be assigned to companies or governments but not private individuals.
The LEI system is controlled by three authorities that ensure the system is trustworthy, transparent, and dependable:
- ROC (Regulatory Oversight Committee) – LEI’s global governing, supervisory, and oversight authority
- GLEIF (Global Legal Entity Identifier Foundation) – manages LEI’s issuing organizations and other partners
- LOUs (local operating units) – LEI’s issuing organizations
How Is LEI Obtained?
You can only apply for and get your LEI code from GLEIF-accredited organizations. An LOU will help you register an LEI code. This can take a few hours to a few weeks.
What Is LEI’s Validity Period?
LEI is valid for one year from the registration date, after which an annual renewal is required. Just like at the time of registration, the renewal will also be done by a financial partner, like italialei.it, accredited to GLEIF. You’ll be required to update your entity’s information at the time of renewal.
What Is The Purpose Of LEI?
An LEI system was put to use in 2012 after the 2007-2008 global financial crisis. Regulators realized that an international coding system distinct to each legal entity would make it easy to identify financial transactions. It was developed to track, assess, and manage financial risks. This unique code now makes it easy to evaluate the potential risk held by individual entities and markets and the possible solutions to failing institutions. It also mitigates financial fraud as it encourages transparency in the financial market. The objective of an LEI is to have a standardized system to regulate markets across the globe.
Which Investments Require LEI?
In essence, any legal entity that engages in financial transactions should apply for an LEI code. However, different jurisdictions vary when it comes to eligibility and requirements. Legal entities in the European Union, United Kingdom, and the United States may not be able to trade in the securities market without an LEI. Presently, around 100 regulations globally require the use of LEI.
Level 1 data of LEI connects with the essential elements of an entity’s identification like its official name, registered address, location, registered number, and governing authority. It’s referred to as ‘who is who’ data.
Level 2 data, however, deals with who owns whom. Its objective is to identify the relationships between parent and subsidiary entities in corporate structures. For instance, if your entity is a subsidiary of a direct or ultimate parent and you’re applying or renewing its LEI, you’ll be required to report your parent entity(s). The LEI of the parent entity will then be displayed together with your entity’s LEI.
Some of the legal entities that may be required to have an LEI number include:
- Financial institutions
- Unions
- Bonds
- Charities
- Insurance companies
- Commodities trading
- Banks, lenders, and investment companies
- Pension schemes
- Trusts
- Over-the-counter trades (but not individuals)
- Mutual funds, investment vehicles, and hedge funds
- Entities listed on the stock exchange
- Registered subsidiaries of a company
- Government bureaus
- Nongovernment organizations
- Registered sole proprietors
Is LEI Compulsory?
Since the 3rd of January 2018, it became compulsory for all entities trading in the European financial market trading stocks, bonds, forex, and other securities to have a valid LEI number. Moreover, every service provider in the investment sector is required to ensure that every trader has a valid LEI number. European Union national authorities are now mandated to reject trade where investment firms or their clients don’t’ have an LEI.
Conclusion
The adoption of LEI is now widespread and continues to grow globally. Local and offshore legal entities are now making it a part of their regulations. Having an LEI has many advantages, the first being that your clients and partners will build trust in your entity. Having an LEI will make it easier to comply with government trading regulations. Your financial transactions will be more efficient, especially if your counterparts are also LEI compliant. Having LEI will also enable you to transact financially without disruptions, especially where having LEI is compulsory.
Furthermore, LEI can benefit financial institutions that use different identifiers to identify the same entities. LEI can help consolidate such issues by enabling different institutions to identify the same entity using one identifier.
If LEI is adopted fully, it will bring organization to institutions and make processes more efficient. Tracking, identifying, and understanding financial transactions better will provide safety to institutions and their clients.
