Who needs an LEI number

In the most general sense, an LEI is needed by any legal entity whose activities incorporate financial transactions.

The ISO 17442 standard defines, in its scope, the applicability of the identifier to “legal entities”. This term “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 (e.g. trust, partnership, contractual). It excludes natural persons, but includes governmental organizations and supra-nationals”

This simple and clear definition in ISO 17442 makes all legal entities, other than natural persons (i.e. real people who have its own legal personality), eligible for the LEI. There remains a distinction between the eligibility for LEI identification and the requirement to obtain it, which varies between different jurisdictions. There is also a more subtle category concerning ‘requests’ to obtain an LEI, which is both less demanding than a ‘requirement’ and which also characterises many existing regulations in various jurisdictions.

However, the term is not limited to just entities defined this way. In its broadest definition, the term may also apply to any legal entity doing business in today’s global economy. It is safe to assume that the standard will replace some other identifiers that are currently used to elucidate data about businesses. For example, there is a possibility that the US Government could use LEI instead of the currently used proprietary DUNS system ([1] and [2]).

[1] https://www.open-contracting.org/2016/01/12/how_to_identify_companies _who_receive_government_money/

[2] https://www.datacoalition.org/federal-government-proposes-first-step-away-from-duns-number/

On a practical level, it is safe to assume that in the very near future every company that acts as a legal entity will need an LEI.

At present, LEIs are mandatory for all banks, both small and large, insurance companies, brokerages, investment companies, credit unions and any other entity active on the financial market.

Let’s review its use from the domains of two major financial jurisdictions; that of the European Union and the United States.

Why using LEI in the EU?

As of the third quarter of 2017, there were 55 detailed rules of 13 master financial regulations in EU. 46 of them required the use of LEI for all entities subject to the rules.

The master regulations related to the use of LEI are presented in the following table are:

“No LEI = No Trade”

Of these, one of the most important regulations is MiFiD II / MiFiR, that entered into law on January 3^rd, 2018. As a consequence of the regulation, competent EU national authorities now have the right and obligation to reject trading between investment firms and their clients when there is no LEI on both sides of the transaction.

We can read this in the regulation (link):

“Article 13:

(2) An investment firm shall not provide a service triggering the obligation to submit a transaction report for a transaction entered into on behalf of a client who is eligible for the legal entity identifier code, prior to obtaining the legal entity identifier code from that client.

(3) “The investment firm shall ensure that the length and construction of the code are compliant with the ISO 17442 standard and that the code is included in the Global LEI database maintained by the Central Operating Unit appointed by the Legal Entity Identifier Regulatory Oversight Committee and pertains to the client concerned.”

Furthermore, MiFID II is highly important for asset managers based in the U.S. that operate from a physical location in the European Union and/or serve European clients.

A good explanation of the role of the LEI in this regulation can be found here.

Why using LEI in the US?

Dodd-Frank Act and the OFR

One of the most important regulatory acts in the US, “The Dodd-Frank Wall Street Reform and Consumer Protection Act” culminated in the creation of the Office of Financial Research (OFR) as a part of the Treasury Department. The main role of the OFR is to improve the quality of financial data available to regulators and policymakers and to enable a more robust and sophisticated analysis of the financial system. OFR is a strong advocate of the identifier and mandates its use amongst the various government agencies. Visit the OFR page dedicated to the LEI.

Outside the world of finance, in 2015 the Federal Energy Regulatory Commission (FERC) indicated in its Notice of Proposed Rulemaking (see the docket here) its intention to use the LEI system. According to the proposal, all RTOs (Reginal Transmission Organizations) and ISOs (Independent System Operators) must obtain an LEI and report it to FERC.  This was the first instance of a Federal Agency imposing LEI identification across the markets it supervises [1].

[1] https://www.ferc.gov/whats-new/comm-meet/2015/091715/E-2.pdf

The Current Status

Soon after the LEI system was created, the following regulatory agencies started to require the identification of bank holdings, companies, swap transaction participants, and insurance investments players to utilize the LIE

1. CFTC (Commodity Futures Trading Commission): http://www.cftc.gov/PressRoom/PressReleases/pr6200-12
2. FED(Federal Reserve System): https://www.federalreserve.gov/newsevents/pressreleases/bcreg20150316a.htm
3. NAIC (National Association of Insurance Commissioners): http://www.naic.org/cipr_topics/topic_legal_entity_identifier.htm

Later, regulators such as SEC (Securities and Exchange Commission), MSRB (Municipal Securities Rulemaking Board), and CFTC recommended using LEI in credit rating disclosures, future merchant ownership reports, money market fund submissions and private fund manager reports.

Furthermore, the SEC and CFPG (the Consumer Financial Protection Bureau) made proposals that promulgated the use of LEI in the disclosures of swap transactions and home mortgage submissions.

Financial Transparency Act

The Financial Transparency Act of the US 115^th Congress (H.R. 1530) is rightly recognised as the first U.S. Regtech Law. If and when it is enacted (follow it on Govtrack), it will direct the major U.S. financial regulatory agencies to adopt consistent data models and formats for the information they collect from the financial industry, under the laws regulating the markets of securities, commodities, and banking. Basically, the act mandates the agencies to make the information they collect and publish under existing laws available as open data – digitally searchable, downloadable and free from any license restrictions.

One of the most important aspects of the open data initiative is the ability to identify the entities that the information is about. In this context, the LEI is the only, fully open-sourced existing identifier that can be used for that purpose. Moreover, it is also the only existing, clearly defined data standard that is already accepted as one of the pillars of the Financial Transparency Act by Data Coalition (https://www.datacoalition.org/news/video/):

The Financial Transparency Act will change the way the following regulatory agencies handle data:

• SEC – U.S. Security and Exchange Commission – https://www.sec.gov/
• FED – Federal Reserve System – https://www.federalreserve.gov/
• CFTC – U.S. Commodity Futures Trading Commission – http://www.cftc.gov/
• NCUA – National Credit Union Administration – https://www.ncua.gov/
• CFPB – Consumer Financial Protection Bureau – https://www.consumerfinance.gov/
• FDIC – Federal Insurance Deposit Corporation – https://www.fdic.gov/
• OCC – Office of the Comptroller of the Currency – https://www.occ.treas.gov/
• FHFA – Federal Housing Finance Agency – https://www.fhfa.gov/

It is now certain that all of these Regulatory Agencies will use LEI to identify entities they monitor.

Data Coalition is an organisation that strongly promotes the use of LEI and other Open Data formats.

The Data Foundation can also be recognised as a pivotal organisation for the active promotion of LEI (http://www.datafoundation.org). The Data Foundation’s mission is to define an open future for government and society data through research, education, and programming.