What is a Legal Entity Identifier?
A distinctive global identifier for legal entities taking part in financial transactions is the Legal Entity Identifier (LEI). Its function is to assist in the identification of legal entities on a globally accessible database. It is also known as an LEI code or LEI number. Legal entities are organizations that engage in financial transactions, such as corporations or governmental bodies. An LEI cannot be obtained by an individual. All financial organizations and funds must have an LEI since it is required for reporting to financial regulators under regulatory requirements.
The information in each LEI database entry concerning an entity’s ownership provides answers to the questions “who is who” and “who owns whom”. As a result, the publicly accessible LEI data pool can be viewed as a global directory of non-individual financial market participants.
Information about the entity’s legal name, legal jurisdiction, registration authority, LEI registration date, and status are all part of the publicly accessible LEI data. That data, known as Level 1 data, provides an answer to the query “Who is who?”. Level 2 data describes the parent company and any subsidiaries in relation to one another in corporate hierarchies. “Who owns who?” is the question that the Level 2 data seeks to address. Additionally, information about the LEI code’s initial registration date, most recent update, and next renewal date, as well as the registration status and management LOU, can be found among the LEI reference letter.
How Does LEI Work?
To identify legal entities involved in various financial activities, 45 jurisdictions’ authorities now require the use of the LEI code. The LEI code offers crucial data for financial transactions and aids in the identification of legal organizations. According to the Global Legal Entity Identifier Foundation, more than 1.9 million LEIs have been issued globally.
It is constructed in 20-character, alphanumeric format of the identifier is based on the ISO 17442 standard created by the International Organization for Standardization (ISO). It connects to crucial data that makes it possible to clearly and specifically identify the legal organizations taking part in financial operations. December 2012 saw the issuance of the first LEI’s. As of 3 January 2018, LEIs are needed for all companies who intend to continue trading in securities.
How did LEI form?
Regulators realized there was no global system for identifying financial institutions with a single identification code at the height of the financial crisis of 2007–2008. It indicates that each nation used a unique set of coding to identify the corporate counterpart in financial transactions. As a result, it was impossible to identify the counterpart of financial transactions, determine the entire risk amount, or determine the transaction specifics of specific firms. This made it challenging to determine how much of a risk each firm was exposed to, to analyze market risks, and to deal with failing financial institutions. This is one of the elements that complicated the beginning stages of the financial crisis.
To completely trace organizations’ financial activities across many national jurisdictions, the 2011 G20 devised the LEI system in response to financial institutions’ inability to identify organizations uniquely. The expansion of the LEI is now supported by the Legal Entity Identifier Regulatory Oversight Committee (LEI ROC), an alliance of financial regulators and central banks from around the world. Companies must use the legal entity identifier when reporting to financial regulators the specifics of transactions involving over-the-counter derivatives in the U.S. and Europe.
For how long LEI is valid?
The LEI’s validity period is one year from the date it is registered, and a company or organization’s LEI must be renewed annually to continue participating in regulated financial transactions. That assures that LEI records are up-to-date, since every company has an opportunity to update their LEI entries in the Global LEI database and correct if any information changed.
Renewal can be completed through any LOU that is accredited, and the code does not change even while switching between LOUs (Local Operating Units).
Who Needs a Legal Entity Identifier?
It is important to note that receiving an LEI code is neither needed nor permitted for private individuals. A registration for an LEI number may be made by any entity that is regarded as a legal entity. Legal entities engaging in financial transactions or conducting business within the financial system are required to have LEI codes. Legal entities in the UK, EU, and the US in particular are likely to need an LEI. If a legal entity does not have an LEI, trade may frequently be prohibited. Although regulatory organizations may demand LEIs, many businesses also request them.
The use of LEI codes is currently mandated by around 100 regulations across several countries. Legal entities of the following sorts, but not limited to, could be required to obtain an LEI:
• Contract for Differences
• SFTR reporting for securities transactions
• Pension plans
• Trading in commodities
• Lenders, banks, and investment firms
• Dealing in OTC derivatives (except private individuals)
• Organizations with stock exchange listings
• Financial middlemen
• Hedge funds, mutual funds, and investment vehicles
• Traders and trustees of Self Managed Superannuation Funds
How and where to obtain a Legal Entity Identifier?
An LEI application must be filled out in order to request a legal entity identifier. An LEI can be acquired via an LEI registration agent or a Local Operating Unit (LOU), which are the organizations responsible for issuing LEI codes. To be permitted to issue LEIs, LOUs must be accredited by the Global Legal Entity Identifier Foundation (GLEIF). LOUs offer registration and renewal in addition to other services. Customers and LOUs are connected by registration agents, who handle every step of the process and make it as simple as possible for the end user.
Typically, the application procedure is simple and only requires the customer to submit entity data. The following details are among those needed:
- The entity name.
- A company’s registration ID or number
- The name and contact details of the applicant
- Entity address
If possible, the entity data is verified by the pertinent official business registry. Many LEI issuers, often financial exchanges or financial data vendors, establish and maintain the identifiers while serving as the principal interfaces to the global directory. These are authorized to issue LEIs by the GLEIF.
