From Counterparty Identification to Business Value: The Use of the LEI in Capital Markets
Joint McKinsey & Company and GLEIF white paper identifies the additional applications of the LEI across the entire lifecycle of the client relationship in capital markets
Author: Stephan Wolf
Date: 2017-11-24
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The recent white paper released by McKinsey & Company and the Global Legal Entity Identifier Foundation (GLEIF) titled ‘The Legal Entity Identifier: The Value of the Unique Counterparty ID’ (see ‘related links’ below), clearly illustrates the applications of the Legal Entity Identifier (LEI) across the entire lifecycle of the client relationship in capital markets. The LEI’s primary value in this segment is derived from reducing the cost of onboarding clients and of middle- and back-office activities related to the processing of stocks, bonds and other securities trades.
This blog takes a closer look at the use of the LEI in onboarding processes. However, its application in internal operations is also important. Internal operations teams increasingly deploy the LEI as the primary attribute that aggregates and reconciles client trade information which is often stored in disparate internal systems and tagged under different client ID numbers. They have found that internal communications and trade reconciliation-related tasks have been simplified and expedited through its use.
The use of LEIs in capital markets
The use of the LEI became more widespread in the industry with the implementation of the Dodd-Frank Act in the U.S. and the European Market Infrastructure Regulation. Since then, banks have also discovered benefits beyond the ability to instantaneously identify counterparties in over-the-counter (OTC) derivatives transactions. In particular, they have found that the LEI has additional applications that span the entire lifecycle of the client relationship.
Creating business value with the LEI: client onboarding
Client onboarding has emerged as another area where banks are beginning to use the LEI as an effective identifier. This is particularly true for activities relating to know-your-customer (KYC) requirements and documentation management.
In KYC processes, firms work to verify their clients’ identity by conducting robust due diligence. The lack of consistency within these processes means that banks spend considerable time and resource on the effort. To further complicate the matter, different areas of the bank may use different identifiers for the same client, and vendors engaged by the bank to assist in the collection of KYC-related information may use their own identifiers as well. What should be a simple task is, in fact, a complex, time-consuming and resource intensive effort.
In addition to this, the consequences for the client can be dire. For example, if a client needs to raise money quickly, they may put in an order to sell a bond or a stock. But, the bank may struggle to immediately locate the documents due to them being tagged with an account number instead of a legal entity ID and as a consequence, could block the client’s account from trading.
In comparison, if all players in the process tagged client information with an LEI, it would be much more efficient and transparent. Beyond simplifying processes and ensuring better customer service, LEIs can also expand FTE capacity and enable banks to do business with clients faster. Typically, investment banks employ 1,000 to 1,500 FTEs who focus on onboarding and, according to McKinsey, the average onboarding process takes 120 days. If the LEI was adopted more broadly, onboarding time could be materially shortened so that banks can start trading with their clients much sooner and the onboarding team could be made available for other functions.
The result of the white paper was the estimation that introducing LEIs into capital market onboarding and securities trade processing could reduce annual trade processing and onboarding costs by 10 percent. This would lead to a 3.5 percent reduction in overall trade processing and capital markets onboarding costs, amounting to over U.S.$ 150 million in annual savings for the global investment banking industry alone.
Banks that have yet to adopt the LEI in trade processing or onboarding could reap benefits in terms of efficiency, speed and improved client service. The benefits to all banks would be significantly enhanced if a greater number of legal entities obtained LEIs. More specifically, they could expect to gather additional revenue by shortening ‘time to market’ for trading with customers while simultaneously improving the client experience.
Here at GLEIF, we are actively encouraging organizations to consider the adoption of LEIs in their day to day processes and we hope this paper will broaden the understanding around potential use of LEIs, as well as sparking further debate about their cost saving and efficiency benefits. The potential uses for the LEI extend well beyond the current uptake and GLEIF is keen to explore this idea with other organizations in a variety of sectors.
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Stephan Wolf is the CEO of the Global Legal Entity Identifier Foundation (GLEIF). Since March 2024, he has led the International Chamber of Commerce (ICC)’s Industry Advisory Board (IAB) of the Digital Standards Initiative, the global platform for digital trade standards alignment, adoption, and engagement. Before he was appointed as Chair, he had been serving as Vice-Chair of the IAB since 2023. In the same year, he was elected to the Board of the International Chamber of Commerce (ICC) Germany.
Between January 2017 and June 2020, Mr. Wolf was Co-convener of the International Organization for Standardization Technical Committee 68 FinTech Technical Advisory Group (ISO TC 68 FinTech TAG). In January 2017, Mr. Wolf was named one of the Top 100 Leaders in Identity by One World Identity. He has extensive experience in establishing data operations and global implementation strategies. He has led the advancement of key business and product development strategies throughout his career. Mr. Wolf co-founded IS Innovative Software GmbH in 1989 and served first as its managing director. He was later named spokesman of the executive board of its successor, IS.Teledata AG. This company ultimately became part of Interactive Data Corporation, where Mr. Wolf held the role of CTO. Mr. Wolf holds a university degree in business administration from J. W. Goethe University, Frankfurt am Main.
