Panama Papers ‘scandal’ underscored the need for securing LEI codes for your financial service enterprise; LEI is a global regulatory issue, not merely a vanity tag.
The universe of securities reference data code types across the global financial industry ecosystem seems to keep growing. Leading the pack are necessarily the ubiquitous and most commonly referenced CUSIP, ISIN (International Securities Identification Number) and SEDOL instrument identifiers, to the aspiring FIGI code promoted by Bloomberg LP and the equally aspirational effort by InteractiveData to promote its MexID code for use by institutional fund managers in the course of tagging their respective underlying funds so as to meet the needs of global clearing facilities.
With that, and in connection with MiFID II initiatives that are scheduled to be in full force as of January 2018, fund managers, Issuers, investment bankers and broker-dealers; effectively any party that engages in a financial transaction (exclusive of end investors) will need to have a Legal Entity Identifier aka LEI code added to the mix of reference data elements in order to address a respective firm’s compliance check list. Compounding the reference code maintenance and securities masterfile tasks, there is a burgeoning demand from across the compliance sector for services that can ‘map’ LEI codes to respective ISIN code-certified instruments.
For those not already aware, the Legal Entity Identifier (LEI) is a 20-character reference code to uniquely identify legally distinct entities that engage in financial transactions and associated reference data. Two fundamental principles of the LEI code are:
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Uniqueness: an LEI is assigned to a unique entity. Once assigned to an entity, and even if this entity has for instance ceased to exist, a code should never be assigned to another entity.
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Exclusivity: a legal entity that has obtained an LEI cannot obtain another one. Entities may port the maintenance of their LEI from one operator to another. The LEI remains unchanged in the process.
As the global financial industry at large works towards creating awareness among its constituents as to the imperative of acquiring an LEI code, below update as to evolution of LEI implementation is courtesy of insight provided by DTCC Managing Director Ron Jordan via his submission to industry publication WatersTechnology.
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With the legal entity identifier making great progress since its inception, and especially in the past year, the DTCC’s Ron Jordan says momentum must continue for adoption in more markets and better hierarchies.
Ron Jordan, Managing Director DTCC
It’s hard to believe that August 21 marked the fourth anniversary of the start of the Depository Trust & Clearing Corporations’ CFTC Interim Compliance Identifier (CICI) utility, the service that issued legal entity identifiers (LEIs) for derivatives reporting. A lot of progress has been made by the industry in those four years as more participants have obtained LEIs for regulatory reporting. At present, at least 450,000 LEIs have been issued by 29 endorsed Local Operating Units (LOUs), including the DTCC’s Global Markets Entity Identifier (GMEI) utility.
But there is still much to achieve if we are to live up to the full potential of the LEI. While there have been a number of developments in the past 12 months, there are opportunities to expand LEI mandates ensuring the Global LEI System (GLEIS) continues to grow in its function as one of the key pillars of systemic risk management.
We have seen derivatives reporting using LEIs extend to other jurisdictions. In Canada, the LEI was mandated in Alberta, British Columbia, Nova Scotia and Saskatchewan, while Russia and Switzerland also finalized rules requiring LEIs for derivatives reporting. The US Securities and Exchange Commission (SEC) has mandated LEIs for recordkeeping and reporting of security-based swaps, and has proposed rules to modernize reporting for registered investment companies which require SEC-registered funds to identify themselves and various classes of counterparties leveraging LEIs.
In Canada, dealer members began reporting all over-the-counter debt securities transactions using LEIs beginning November 1, 2015, in accordance with the Investment Industry Regulatory Organization of Canada requirements.
In Europe, additional LEI mandates have been finalized this year. Under the revised Markets in Financial Instruments Directive (MiFID II), the European Securities and Markets Authority has mandated LEIs for all trades, investments and issuers, including non-EU firms trading European securities, and has stated that firms cannot trade without an LEI. This will require many more firms, including those in the US, that have not yet registered for an LEI to do so. Further uptake of LEIs has also resulted from the implementation of Solvency II across the European insurance industry.
Looking further afield, we have heard encouraging discussions among the regulatory community in North Africa and the Middle East. In April, the Saudi Arabian Monetary Agency hosted a meeting of the Financial Stability Board Regional Consultative Group for the Middle East and North Africa. The meeting concluded with a discussion on the structure and governance of the GLEIS and its role in supporting authorities and market participants in identifying and managing financial risks.
More recently, we’ve seen progress on a global scale, extending to correspondent banking. In July, a final report released by the Committee on Payments and Market Infrastructures set out five recommendations to alleviate some of the costs and concerns affecting correspondent banking activities, one of which was the use of the LEI.
While great progress has been made in the financial services sector, we’re only just starting to see regulators take a deeper look into global corporate transparency. Nowhere has this been more apparent than in the case of the Panama Papers, a unique aspect of which was the extent to which investor information was unravelled and interpreted from vast amounts of unstructured electronic data. Undoubtedly, the LEI could be a solution to making sense of the maze of corporate entities that take part in cross-border transactions while limiting malfeasance and market abuse.
Recently, the Regulatory Oversight Committee published a final proposal to collect and share data around relationships between legal entities and their ownership, which will enable the industry to build improved versions of hierarchies of legal entities, advancing the ability to analyze aggregated exposures. This has been facilitated by the GLEIF’s launch of a data challenge facility, which allows any individual to challenge the validity of an LEI-including its related reference data-to improve the accuracy and quality of legal entity information.
To continue reading the column via WatersTechnology, click here