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Legal Entity Identifier News: August 2016 Update

Global Legal Entity Identifier Foundation provides an overview of the latest global developments relevant to Legal Entity Identifier adoption

Author: Stephan Wolf

  • Date: 2016-08-09
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  • Estimated Reading Time: 21 minutes


In June 2016, the Financial Times (FT) commented in a story, entitled ‘Connect the corporate dots to see true transparency’ with regard to the Legal Entity Identifier (LEI): ”One reason why it is currently hard to track the scale of Chinese corporate debt, say, is that it is being issued by an opaque web of legal entities. Similarly, regulators struggled to cope with the fallout from the Lehman Brothers collapse in 2008 because the bank was operating almost 3,000 different legal entities around the world. Is there a solution to this? A good place to start would be for governments to put their corporate registries online. Another crucial step would be for governments and companies to agree on a common standard for labelling legal entities, so that these can be tracked across borders.”

The FT concludes: “Happily, work on that has begun: in 2014, the Global Legal Entity Identifier Foundation was created. It supports the implementation and use of ‘legal entity identifiers’, a data standard that identifies participants in financial transactions. Groups such as the Data Coalition in Washington DC are lobbying for laws that would force companies to use LEIs. (…) with every data scrape, or use of an LEI, the picture of global corporate activity is becoming slightly less opaque thanks to the work of a hidden army of geeks. They deserve acclaim and support — even (or especially) from management consultants.”

To make it easy for stakeholders to follow global developments relevant to LEI rollout, the Global Legal Entity Identifier Foundation (GLEIF) provides related updates via the GLEIF Blog. This blog post summarizes LEI news tracked since May 2016.

Sources cited in this blog are included in the ‘related links’ below.

Mario Draghi, President of the European Central Bank, calls for the “establishment of mandatory requirements” regarding the use of the International Securities Identification Number and the LEI

At the Eighth European Central Bank (ECB) Statistics Conference, which took place on 6 July 2016, ECB President Mario Draghi reiterated: “The title of today’s conference is ‘Central bank statistics: moving beyond the aggregates’. Disaggregated data are indeed necessary to identify and analyse the heterogeneity that characterises the real world. For central banks this is particularly important: to implement policy in the most effective way, we need to know how our policy actions affect all sectors of the economy. Both the challenges posed by the current economic climate for monetary and macroprudential policy, and the information required to carry out microprudential supervision by the Single Supervisory Mechanism (SSM) increase our need for granular data.”

“But this need for a greater level of disaggregation of data comes with its own challenges. The first one is to ensure that data are collected in a way that permits multiple uses. This requires greater harmonisation, and an ability to share data between institutions in a way that still respects confidentiality. The second challenge is to engage with the financial sector to ensure that the increase in data collection does not become burdensome.”

“But the need for harmonisation and standardisation also extends beyond Europe. Finance is a global business, and both the regulation and the underlying data requirements for global institutions would benefit from more harmonisation worldwide. Concrete steps towards standardisation include the establishment of mandatory requirements regarding the use of the International Securities Identification Number and the global Legal Entity Identifier. Europe should retain its prominent role in the implementation of the second phase of the G20 Data Gaps Initiative.”

U.S. Financial Stability Oversight Council: “Broader adoption of the LEI by financial market participants continues to be a Council priority”

The Financial Stability Oversight Council (FSOC) is charged with identifying risks to the financial stability of the United States (U.S.); promoting market discipline; and responding to emerging risks to the stability of the United States' financial system. In its 6th Annual Report, the FSOC states that broader “adoption of the LEI by financial market participants continues to be a Council priority. When the global LEI system begins collecting and publishing information on entity hierarchy data, it will be critical that all legal entities within a complex financial institution have an LEI so that a complete picture of these ownership structures can be viewed by authorities and the public. To facilitate this broad coverage of the LEI, the Council recommends that member agencies continue moving to adopt the use of the LEI in regulatory reporting and other data collections, where appropriate.” (For more information on the future expansion of the LEI data pool to include information on direct and ultimate parents, refer to the ‘related links’ below.)

Committee on Payments and Market Infrastructures: Final report on correspondent banking includes recommendations on the use of the LEI

The Committee on Payments and Market Infrastructures (CPMI) promotes the safety and efficiency of payment, clearing, settlement and related arrangements, thereby supporting financial stability and the wider economy. The CPMI monitors and analyses developments in these arrangements, both within and across jurisdictions. It also serves as a forum for central bank cooperation in related oversight, policy and operational matters, including the provision of central bank services. The CPMI is a global standard setter in this area. It aims at strengthening regulation, policy and practices regarding such arrangements worldwide. The CPMI secretariat is hosted by the Bank for International Settlements (BIS).

The final report ‘Correspondent Banking’ released by the CPMI on 13 July 2016 sets out five recommendations to help alleviate some of the costs and concerns affecting correspondent banking activities.

The related press release issued by the BIS states: “Until recently, banks have maintained a broad network of correspondent relationships, but there are growing indications that this situation might be changing. This implies a threat that cross-border payment networks might fragment and that the range of available options for these transactions could narrow. Correspondent banking is an essential component of the global payment system, especially for cross-border transactions. Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border payment services to their customers, supporting, inter alia, international trade and financial inclusion.”

“The Correspondent banking report provides some basic definitions, outlines the main types of correspondent banking arrangement, summarises recent developments and touches on the underlying drivers. The report then develops recommendations on certain measures relating to (i) know-your-customer (KYC) utilities; (ii) use of the (…) LEI in correspondent banking; (iii) information-sharing initiatives; (iv) payment messages; and (v) use of the LEI as additional information in payment messages.”

“CPMI believes that, as the next step towards implementation, these measures should be further analysed by all relevant authorities and stakeholders in order to gauge the potential impact of each measure and to avoid unintended consequences. The CPMI expects that the relevant stakeholders will initiate any necessary reviews or investigations in the light of the five recommendations as soon as possible.”

With regard to the use of the LEI in correspondent banking, specifically, the report recommends: “In addition to the general promotion of LEIs for legal entities, relevant stakeholders may consider specifically promoting the use of the LEI for all banks involved in correspondent banking as a means of identification that should be provided in KYC utilities and information-sharing arrangements. In a cross-border context, this measure should ideally be coordinated and applied simultaneously in a large number of jurisdictions. All authorities and relevant stakeholders may wish to consider promoting BIC [Business Identifier Code]-to-LEI mapping facilities, which allow for routing information available in the payment message to be easily mapped into the relevant LEI. In addition, the relevant authorities (eg the LEI Regulatory Oversight Committee (LEI ROC) and AMLEG) are encouraged to elaborate further as to what extent banks can rely on the LEI as a means of accessing reliable information to support customer due diligence in correspondent banking.”

AMLEG stands for AML/CFT [anti-money laundering / combating the financing of terrorism] Expert Group.

Concerning the use of the LEI as additional information in payment messages, the report states: “The use of the LEI as additional information in payment messages should be possible on an optional basis in the current relevant payment messages (…). To allow for the optional usage of the LEI, relevant stakeholders (eg the PMPG) should work to define a common market practice for how to include the LEI in the current relevant payment messages without changing the current message structure. Also, as part of a potential future migration to message formats based on the ISO 20022 standard, relevant stakeholders (ie ISO and SWIFT) are encouraged to consider developing dedicated codes or data items for the inclusion of the LEI in these payment messages.”

The Payments Market Practice Group (PMPG) provides a truly global forum to drive better market practices, which, together with correct use of standards, will help in achieving full straight-through-processing and improved customer service. For more information, refer to the ‘related links’ below.

ISO 20022 is a multi-part international standard prepared by the International Organization for Standardization Technical Committee TC68 Financial Services. For more information, refer to the ‘related links’ below.

Christine Lagarde, Managing Director of the International Monetary Fund (IMF): Steps taken to reduce risk in correspondent banking include “use of the LEI for banks and large firms involved in certain transactions”

In a speech on 18 July 2016, entitled ‘Relations in Banking – Making it Work for Everyone’, Christine Lagarde, Managing Director of the International Monetary Fund (IMF) emphasized with regard to correspondent banking: “There is a need for action on the part of the countries affected, the regulators, and the global banks. All three have a stake in addressing this issue. Clearly, the affected countries themselves need to be called to task. They need to upgrade their regulatory and supervisory frameworks to enhance compliance with international standards, especially in the areas of AML/CFT and tax transparency. The case of Mexico is illustrative of how such action has led to improvements in correspondent banking relations. The authorities issued regulations to increase AML/CFT controls, especially for institutions involved in high-risk activities, and required the use of (…) [the] Legal Entity Identifier for banks and large firms involved in certain transactions. These steps were taken in coordination with the home authorities of major global banks. They reduced the risk of disruption in correspondent banking, and improved the robustness of the domestic regulatory framework at the same time.”

LEI Regulatory Oversight Committee: Policy document on including data on international / foreign branches in the Global LEI System

The LEI Regulatory Oversight Committee (LEI ROC) is a group of public authorities from around the globe established in January 2013 to coordinate and oversee a worldwide framework of legal entity identification, the Global LEI System. In its role as overseer of GLEIF, the LEI ROC ensures that GLEIF upholds the principles of the system.

On 11 July 2016, the LEI ROC published the final version of its policy document, entitled ‘Including data on international/foreign branches in the Global LEI System’, including a summary of responses to the public consultation.

This policy document “sets forth the policy design, definitions, and conditions for issuance of LEIs for international branches (also known as foreign branches and hereafter referred to as “international branches”). Implementation is expected to start in early 2017, subject to [LEI] ROC concurrence with an appropriate framework being established to ensure that the conditions described in this document are met. Once the framework is established, the [LEI] ROC will communicate a more precise implementation date to stakeholders.” This approach is responsive to the mandate to make the Global LEI System “as open and inclusive as possible, and therefore more useful for both regulators and financial market participants, while also maintaining data integrity and upholding the founding principles” of the system.

The LEI ROC defines through this policy document a standard for the Global LEI System that will allow LEIs to be issued to branches under the following conditions:

  1. The branch is a lead international branch or international branch network outside of the head office’s jurisdiction. For purposes of this policy document, jurisdiction is synonymous with “country” and a lead international branch or international branch network outside of the head office’s jurisdiction is defined as a non-incorporated establishment of a head office legal entity, when this establishment is located in a separate jurisdiction from the jurisdiction in which the head office legal entity is located, i.e., in a host jurisdiction outside of its home jurisdiction. Under this definition, an establishment may consist of a single office or other business premises, or of several offices (i.e., a branch network) in different locations of the same host jurisdiction: even in the latter case, only one LEI would be issued per host jurisdiction, essentially amounting to, “one country-one LEI.” Unlike foreign subsidiaries of a parent entity, which are separately incorporated or organised under the laws of the host jurisdictions, an international branch, as defined here, is legally dependent on the head office legal entity and cannot exist without its head office legal entity;
  2. The branch is registered in a publicly accessible local business registry or local regulatory registry or tax registry;
  3. The head office (or headquarters) of the branch already has an LEI so that the LEI of the head office entity can always be associated with the LEI of the international branch in the Global LEI System; and
  4. The reference data of the branch in the LEI system always specifies that the entity is a branch, in a way that is easily accessible to users.

The LEI ROC “recognizes that this approach does not cover all branch identification needs. However, it should be noted that this approach does not preclude expanding the Global LEI System in some way in the future to include additional branch data after learning from the experience gained through this implementation.” As the LEI ROC considers its future work program, it will continue to evaluate options for including additional entity information in the Global LEI System and may conduct a public consultation on these topics at a later date.

Canadian derivatives trade reporting amendments impact dealers and end-users

As reported by JD Supra Business Advisor, on 12 May 2016, “securities regulators in Ontario, Québec and Manitoba announced changes to existing derivatives trade reporting requirements that will be of interest to both derivatives dealers and ‘end-users’ of derivatives. The amendments to existing reporting rules (TR Amendments) impose a specific obligation on each transacting party to obtain and maintain an LEI; formalize prior relief from the obligation to report end-users’ inter-affiliate trades; postpone and narrow requirements for the public dissemination of anonymous transaction-level data; and make other technical amendments to reporting requirements.”

“’End-users’ (i.e., counterparties that are not engaged in the business of trading in derivatives) generally have no direct trade reporting obligations when entering into transactions with counterparties that are ‘derivatives dealers’ (i.e., counterparties that are engaged in the business of trading in derivatives in the province or territory where the end-user is a local counterparty). As a result, the Existing Rules have had a very limited impact on end-users, except when entering into derivatives transactions with other end-users and to the extent that end-users have been requested by counterparties to obtain an LEI.”

“The following changes under the TR Amendments will be relevant to end-users: (…) Subject to limited exceptions, the TR Amendments impose a direct obligation on counterparties (including end-users) to obtain, maintain and renew LEIs. (…) This new requirement addresses a gap in the Existing Rules: reporting counterparties are required to report LEIs for their counterparties, but a reporting counterparty has no right to apply for an LEI on behalf of its counterparty and until the TR Amendments were issued, there was no legal obligation imposed directly on a non-reporting party to obtain an LEI.”

Canada: Securities regulators amend derivatives reporting rules

As reported by Advisor.CA on 4 July 2016, on that day securities regulators in Alberta, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island and Yukon “announced the adoption of amendments to Multilateral Instruments 91-101 Derivatives: Product Determination and 96-101 Trade Repositories and Derivatives Data Reporting. At the same time, Saskatchewan announced it is adopting the amendments to MI 96-101 and publishing the amendments to MI 91-101 for comment.”

Subject to Ministerial approvals, the amendments will be implemented on 30 September 2016. “The instruments established rules governing the reporting and collection of over-the-counter (OTC) derivatives data. The amendments are designed to improve the regulatory oversight of the OTC derivatives market, which includes the ability to identify and address systemic risk and the risk of market abuse.”

The amendments implement, among others things:

  • A requirement for all local counterparties to obtain an LEI;
  • an exemption for inter-affiliate derivatives; and
  • requirements relating to public dissemination of transaction-level data for certain OTC derivatives.

“The amendments are substantively harmonized with recent amendments to corresponding local OTC derivatives reporting rules in Manitoba, Ontario and Québec. Subject to Ministerial approval, the British Columbia Securities Commission anticipates publishing the amended instruments in the near future.”

U.S. Federal Energy Regulatory Commission alters proposal to enhance reporting in support of enforcement

As reported by The National Law Review, at the U.S. “Federal Energy Regulatory Commission’s (‘FERC’ or ‘Commission’) July 21, 2016 meeting, FERC issued a Notice of Proposed Rulemaking (‘NOPR’) proposing to establish a new reporting regime that would require market-based rate (‘MBR’) sellers and entities only trading virtual products and financial transmission rights in markets operated by Regional Transmission Organizations (‘RTO’) and Independent System Operators (‘ISO’) (‘Virtual/FTR Participants’) to submit detailed ownership, employee, and contractual information to a database maintained by FERC. (…) All MBR sellers and Virtual/FTR Participants would be required to obtain an (…) LEI (…) and report it to FERC. Many companies likely have an LEI used for other purposes.”

“The proposals set out in the July 21 NOPR are modified versions of proposals contained in two NOPRs issued late last year, including a proposal that any entity participating in RTO/ISO markets identify and report any ‘Connected Entities’—a term that had been defined to include a range of affiliate, employee, and business relationships that previously had not been subject to FERC scrutiny.  In related issuances, the Commission withdrew its two earlier NOPRs.  While the July 21 NOPR attempts to respond to criticisms of its initial Connected Entity proposal by reworking the definition of Connected Entity, the July 21 NOPR would impose significant new reporting requirements on all MBR sellers (not just those in RTO/ISO markets) and Virtual/FTR Participants that will materially increase compliance risk. (…) FERC appears to recognize the need for dialogue with industry regarding its proposals and plans to hold a series of technical workshops to further explore its proposed rule. The first technical workshop is scheduled for August 11, 2016.”

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About the author:

Stephan Wolf is the CEO of the Global Legal Entity Identifier Foundation (GLEIF). Since January 2017, Mr. Wolf is 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 strategy. 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.

Tags for this article:
Over-the-Counter (OTC) Derivatives, Policy Requirements, Standards, Regulation, Compliance, Correspondent Banking, LEI News