The LEI code allows for greater transparency in global financial transactions by identifying the precise legal entity on both sides of a transaction. It also makes life easier for companies interacting with government agencies by reducing manual identification efforts.
But for these “killer applications” to be realized, there needs to be strong leadership from regulatory bodies.
What is an LEI?
A Legal Entity Identifier (LEI) is a unique reference code that identifies a legal entity participating in financial markets globally. It enables regulators and risk managers to identify the parties to any financial transaction instantly, regardless of where, when and how they engage in it. A company can have multiple LEIs that represent different parts of its group structure, or it can use a single LEI to refer to all of its market activities and transactions.
The global LEI system was established in 2012, following the 2008 financial crisis when issues with transparency and identifying counter parties to trading were exposed. The system was designed to be a linchpin for financial data — the first global and unique identifier enabling risk managers and regulators to identify entities to any financial transaction instantly and precisely.
LEIs are assigned to market participants in a standardized way and are publicly accessible and free of charge. They contain reference data about a company that is updated frequently, including its name, where it is registered, its legal jurisdiction, its managing entity or ‘LOU’, and whether it is a parent company or owns subsidiaries. It also includes check digits that ensure the LEI is valid.
The LEI code is 20 characters long and contains both alpha-numeric characters and a check digit, based on the ISO 17442 standard. The initial registration date, renewal dates and the status of a company’s LEI are all public information that can be accessed through a search engine. The LEI also has Level 2 data that reveals the relationships between entities, answering the question ‘who owns whom?’
The use of the LEI can help companies meet KYC and AML regulations. It can also cut costs associated with data collection and processing, aggregation and reporting to regulatory authorities. In addition, it can improve the efficiency of internal processes and reduce operational risk. Moreover, the machine-readable and system-agnostic nature of the LEI means it can be used alongside similar identifiers such as ISIN. This makes the LEI a key component in any effective KYC and AML process.
Why is an LEI important?
The LEI is a globally unique, non-repeating identifier that offers transparency in financial markets. It provides a consistent way to identify legal entities across markets, jurisdictions and regulators. By making it easier to see the connections between firms and instruments, the LEI enables greater efficiency in data collection, reporting, risk management, and due diligence. The unique identifier also allows for more accurate measurement of exposures and connections across the global financial system.
The importance of the LEI was heightened in the aftermath of the 2008 market crisis, when it became apparent that there were a number of issues related to the lack of transparency in the financial markets. In particular, the failure of Lehman Brothers left many investors confused about their total exposure because the various entities involved in the bankruptcy were not easily identifiable. The LEI was designed to address this issue and has since become an integral part of the global financial system.
In addition to improving transparency and reducing risk, the LEI helps to streamline regulatory reporting, and makes it easier for global financial institutions to comply with local regulations. In fact, research has shown that the use of LEIs could save banks 2-4 billion dollars annually in costs related to KYC processes alone.
To encourage more widespread adoption of the LEI, the G-20 finance ministers and senior regulators working through the FSB agreed to incorporate the identifier into several aspects of international financial regulation, including derivatives transaction reporting. The FSB has also endorsed the idea of expanding the LEI to include legal entities outside the financial sector, such as insurers, reinsurers, banks, and asset managers.
Currently, there are 184 global regulations that require the use of an LEI. It is an essential tool for anyone trading in the global marketplace, and it can be used to streamline onboarding with different financial institutions. Obtaining an LEI is quick and easy, and it offers numerous benefits to both individuals and businesses. If you are not yet using an LEI, now is the time to get one! Start the process by visiting LEI Worldwide to register today.
How do I get an LEI?
The LEI, or Legal Entity Identifier code, operates as a reference code that helps to ensure transparency during financial transactions. The global LEI system is backed by the GLEIF and was called for and driven by the G20 and the Financial Stability Board in the wake of the stock market crash of 2008.
There are a number of different ways that you can get your own LEI. Typically, the LEI is issued by an accredited Local Operating Unit (LEI LOU) after an entity submits a minimum set of reference data and undergoes a rigorous validation process. The LEI then follows the entity through its lifecycle, remaining linked to up-to-date information about that entity and its relationships – also see here for a detailed explanation about “lei kode”.
Most organisations will require an LEI, particularly those in the regulated financial sector. This includes companies trading shares or securities, those lending money and those that are listed on a stock exchange. For example, in the EU, investment firms and their clients will need to have an LEI from January 2018 onwards as per the new MiFID II/MiFiR regulations.
Even for those that are not required to have an LEI it is becoming increasingly common for private companies such as Limited Companies and Sole Traders to get one for their business. An LEI can give a company an instant credibility boost and acts as a globally recognised identity card.
During the LEI application process you will need to provide basic company information such as the name, address, directors or person legally responsible and key contact details. You will also have the option to report on additional Level 2 data such as parent company information. This can help to reduce the amount of time spent on KYC and AML checks by allowing you to quickly identify related entities.
There is a fee associated with obtaining an LEI, which goes towards the cost of administration and regulation for the global LEI system. Here at RapidLEI we can provide a full range of services to get your own LEI including new LEIs, renewals, and reactivating a lapsed LEI. We can also assist with transferring an existing LEI from another provider.
What if my LEI lapses?
The global LEI system is used by regulators and market participants to identify and verify legal entities in financial transactions. It relies on a reliable pool of data that is regularly re-validated. If a registered LEI does not submit the required reference data by its ‘Next Renewal Date’, the registration status is set to ‘LAPSED’. The rate of lapsed LEIs is an ongoing challenge for the Global LEI System.
It is important to understand the impact a LAPSED status can have on your business and operations. Lapsed LEIs are considered ‘unreliable’ and therefore not eligible to be reported on in transactional documents or verified by regulators. This can negatively impact your credibility in the financial industry and lead to potential sanctions, fines or legal repercussions as well as strained relationships with regulators.
Aside from the negative impact on regulatory compliance, a lapsed LEI can also lead to lost business opportunities. Many trading partners will only do business with a reporting entity that has an active LEI. Some of these businesses and organizations even have a “no LEI, no trade” policy.
We are committed to educating registered entities on the importance of submitting their reference data and renewing their LEI by the agreed target date. At the same time, we are working to make the renewal process as quick and simple as possible.
In the end, a registered LEI is only useful as long as it is active and accurate. The only way to ensure this is to maintain up-to-date reference data and to keep your LEI up to date.
If you are not currently managing your own LEI through RapidLEI or an alternative partner, we recommend that you switch to your preferred service provider as soon as possible in order to prevent your LEI from averting a lapsed status. The Global LEI System is designed to encourage competition between LEI issuers and registrators. This competitive model makes it possible for you to transfer your LEI from one service provider to another at any time without incurring a lapsed fee.
At LEIpapa we offer a fast and automated LEI renewal process that can be initiated up to 60 days before your LEI is due for renewal. Our fees for LEI renewal are among the lowest in the industry and are automatically deducted from your credit card account or invoice.
