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Legal Entity Identifier News: July 2018 Update

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

Author: Stephan Wolf

  • Date: 2018-07-26
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  • Estimated Reading Time: 26 minutes


To make it easy for stakeholders to follow developments relevant to Legal Entity Identifier (LEI) rollout around the world, the Global Legal Entity Identifier Foundation (GLEIF) provides related updates via its blog.

To recap: The objective behind the introduction of the LEI following the global financial crisis was to increase authorities’ ability to evaluate systemic and emerging risk, identify trends and take corrective steps. While organizations across the globe need to keep on the right side of the regulators, they also need the tools to make smarter, less costly and more reliable decisions about who to do business with. GLEIF, therefore, encourages organizations to think beyond compliance and to consider adopting LEIs in their day-to-day processes. The LEI enables clear and unique identification of legal entities participating in financial transactions by connecting to key reference information. GLEIF makes available the Global LEI Index, which is the only global online source that provides open, standardized and high quality legal entity reference data. Each LEI contains information about an entity’s ownership structure, answering the questions of ‘who is who’ and ‘who owns whom’.

This edition of our ‘Legal Entity Identifier News’ series focuses on the continuing push by market participants representing both the public and private sectors for the adoption of common and global data standards, including the LEI, across financial markets. It is becoming increasingly clear that alignment around global standards supports regulatory as well as business objectives not only at the international, but also at the local level.

This blog post summarizes LEI news tracked since February 2018. Sources cited in this blog are included in the ‘related links’ below.

GLEIF publishes the report titled ‘A New Future for Legal Entity Identification’

In May 2018, GLEIF published the report titled ‘A New Future for Legal Entity Identification’ which outlines the results of research that GLEIF recently undertook with research agency, Loudhouse, on the challenges of entity identification in financial services, including know your customer (KYC) due diligence. The report also shows how replacing disjointed information with a globally accepted approach, based on broad adoption of the LEI, would remove complexity from business transactions and deliver quantifiable value to financial services firms.

Banks operate in multiple jurisdictions and therefore need a global standard. The LEI offers businesses a standardized, one stop approach to entity verification. Financial services businesses can gain greater transparency and work in a more streamlined fashion by adopting an LEI for each client organization. The roll-out of LEIs could increase the stability of international financial markets and support higher quality and accuracy of financial data overall. But businesses could reap individual benefits too, including slicker onboarding, reduced inconsistency, less risk of business losses and more efficient use of valuable resources.

JPMorgan Chase Office of Regulatory Affairs publishes data standardization call to action

In May 2018, Robin Doyle, Managing Director, Office of Regulatory Affairs at JPMorgan Chase and member of GLEIF Board of Directors, published ‘Data Standardization – A Call to Action’ highlighting “the need for the financial services industry, global regulators and other stakeholders to collaboratively build on their progress toward achieving a data standardization framework that addresses current deficiencies and allows innovative new technologies to be adopted.”

The call to action identifies that the consistent “application of financial data and reporting standards within and across jurisdictions remains an important unresolved legacy issue with risk management and financial stability implications.” It also asserts that establishing and implementing “a common global language for financial instruments and transactions will create efficiency, reduce costs and result in the improved usability of financial data to create valuable information and manage systemic risk.” The call to action provides strong endorsement for the LEI. “To support this effort, we believe: The Financial Stability Board (FSB) should continue to promote the consistent application of global data and reporting standards like the Legal Entity Identifier (LEI) across jurisdictions and monitor the progress of adoption.”

Following its publication, the call to action generated further supporting attention from global business reporting standardization body, XBRL.

LEI Regulatory Oversight Committee issues progress report on the Global LEI System and regulatory use of the LEI

In April 2018, the LEI Regulatory Oversight Committee (LEI ROC) published a widely discussed progress report. GLEIF is overseen by the LEI ROC, a group of more than 70 public sector authorities from across the globe that have come together to jointly drive forward transparency within the global financial markets. The report confirms that the “governance of the Global LEI System designed by the FSB with the contribution of private sector participants is now fully in place” and that “all active LEI issuers have now been accredited by the GLEIF under a contractual framework establishing the role of the GLEIF in defining the technical standards of the system and monitoring the compliance of LEI issuers.” The document also reports on actions taken by public authorities, confirming that authorities in jurisdictions represented on the LEI ROC “have adopted at least 91 regulatory actions using the LEI, which are described in this report. […] Examples of LEI uses already adopted in one or more jurisdictions include:

  • Identifying, in regulatory reporting, the [transacting] parties [and their intermediaries] thereby facilitating, among other benefits, the aggregation of data relating to the same entity.
  • Enhancing, especially in a cross-border context or across sectors, the comparability of data reported by banks, insurance companies and other financial institutions.
  • Supporting more granular disclosures of assets held in securitized products and the investors’ ability to conduct more cost effectively their own analysis on these assets.”

When exploring possibilities for supporting the expansion of the LEI system, the report asserts that “standard setters and jurisdictions may consider adopting an LEI strategy that meets their needs” and details four example strategies:

  1. Increase in the number of rules and regulations requiring the LEI, and in the number of jurisdictions adopting such rules.
  2. Adoption of the LEI as a universal identifier by some jurisdictions.
  3. Voluntary adoption of the LEI by market participants.
  4. Facilitating more widespread LEI issuance.

The report also suggests that automation may be a “potential avenue for a further reduction in fees”, and that, under an ‘LEI agent model’, “issuance costs may also benefit from economies of scale given that banks already collect documentation from their customers for their own Know-Your-Customer (KYC) requirements”. It also identifies that “mapping LEIs to other identifiers would increase value for end-users, facilitate interactions with other systems, support data validation and data quality, and perhaps as well save costs for users”.

Market commentator MLex Financial Services noted that “Europe has many more LEIs than does U.S., driven by years of government requirements” […] “The EU has four-and-a-half times as many firms with legal entity identifiers as does the U.S., giving Europe more tools for monitoring banks’ and funds’ risk exposure, new data show.”

Financial Stability Board: FSB peer review of Hong Kong completes first round of country reviews

In February 2018, the Financial Stability Board (FSB) published its peer review of Hong Kong, completing the first round of country reviews of FSB member jurisdictions. “The Hong Kong peer review examined two topics relevant for financial stability: over-the-counter (OTC) derivative market reforms, and the framework for resolution of financial institutions. The review focused on the steps taken by the authorities to implement reforms in these areas”. While the peer review finds that “good progress has been made in recent years on both topics”, it “concludes that there is additional work to be done: On OTC derivatives market reforms [by] actively promoting the use of the Legal Entity Identifier for trade reporting.”

Hong Kong Monetary Authority and Securities and Futures Commission conclude consultation on further enhancements to the OTC derivatives regulatory regime

In June 2018, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) issued conclusions to a joint consultation on further enhancements to the OTC derivatives regulatory regime in Hong Kong. Based on market feedback, the mandatory use of LEIs in trade reporting will only apply to the identification of entities that are on a reporting entity’s side of a transaction. This requirement will apply to the reporting of new transactions and daily valuation information beginning 1 April 2019.

Reporting entities should continue to identify their counterparties in transaction reports in accordance with a waterfall of identifiers specified in the supplementary reporting instructions for OTC derivative transactions. Meanwhile, reporting entities are expected to establish a process to request LEIs from their clients. Regulators will maintain close dialog with reporting entities and keep in view international developments to assess the need for further requirements in this area.

Reserve Bank of India: LEI for non-individual market participants

In April 2018, the Reserve Bank of India (RBI) issued a media statement setting out a range of developmental and regulatory policy measures that, among other objectives, aim to strengthen regulation and supervision of its financial activities. Notably, item 8 of the statement relates to “Legal Entity Identifier (LEI) for Non-individual Market Participants”. Here, the LEI “has been conceived as a key measure to improve the quality and accuracy of financial data systems for better risk management post the Global Financial Crisis.” The statement conveys that “RBI has already implemented the LEI code for all market participants in Over-the-Counter (OTC) derivative products in interest rate, currency and credit markets. It was also made applicable for large corporate borrowers. Continuing with this endeavour to improve transparency in financial markets, it is proposed to implement the LEI mechanism for all financial market transactions undertaken by non-individuals, in interest rate, currency or credit markets.”

In June 2018, RBI released Draft Directions on the “requirement of Legal Entity Identifier Code for participation in non-derivative markets” and invited comments from banks, market participants and other interested parties by 30 June 2018.

United States: Office of Financial Research consults on proposed rule establishing data collection of centrally cleared transactions in the U.S. repurchase agreement market

In July 2018, the Office of Financial Research of the U.S. Treasury (the Office) launched a consultation on a “proposed rule establishing a data collection covering centrally cleared transactions in the U.S. repurchase agreement market. […] The Office's published brief on the interagency bilateral repo pilot collection noted difficulties in working with the data due to the absence of standardized counterparty information.”

The Office proposes to require reporting of an LEI. “The LEI reported must be properly maintained, meaning it must be kept current and up to date according to the standards implemented by the GLEIF. The Office believes that while requiring the LEI may result in some additional compliance costs, doing so is reasonable and appropriate due to the added clarity and substantial benefit for the monitoring it provides and rate production. […] Each legal entity transacting with a covered reporter will be required to obtain only one LEI regardless of the number of reported transactions. […] Mandatory adoption of the LEI will also benefit firms and regulators by improving the ability to combine repo information with other information necessary to monitor system or firm [sic] risk. This is particularly so given that more than 1 million firms have obtained an LEI and are therefore becoming capable of obtaining these benefits. The aggregate cost savings for the financial service industry upon broader adoption of the LEI have been estimated in the hundreds of millions of dollars.”

Ontario Securities Commission publishes update on LEI requirement

In April 2018, the Ontario Securities Commission (OSC) reminded derivatives market participants about the requirement to obtain an LEI under OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting. The rule “requires that reporting counterparties and designated trade repositories (DTRs) identify all counterparties to a transaction by reference to an LEI […] in accordance with the standards set by the Global Legal Entity Identifier System.” Commenting on adherence to the rule, the OSC also “expects that the operational challenges to obtaining counterparty LEIs that existed following initial implementation of the rule have been minimized and no longer present a significant barrier to reporting this information.”

The OSC continues to monitor progress in the uptake of the use of LEIs across jurisdictions and, in the near term, is focused on “monitoring non-reporting of LEIs where counterparties are located in jurisdictions where LEI reporting is a mandatory requirement and no legal impediments to reporting this information are present.”

In a blog commenting on the story, titled ‘No LEI, No Hope’, global business reporting standardization body, XBRL, showed strong support for LEI adoption: “Regulators are streamlining identity by adopting the LEI. With more than 1.2 million LEIs already acquired by companies operating in financial markets, this global identifier is now the preferred solution for regulatory reporting right around the world. […] Just like it took a while for the whole world to get domain names and build corporate web sites, it will take time for this global corporate telephone book to get filled out. Today, in many environments the rule is “No LEI, No Trade”. Before too long it might be “No LEI, No Hope.”

Investment Industry Regulatory Organization of Canada re-publishes client identifier amendments as part of extensive consultation

In June 2018, the Investment Industry Regulatory Organization of Canada (IIROC) opened a second round of public consultation on ways to expand the use of client identifiers to maintain market integrity, protect investors and mitigate risks in electronic trading, while minimizing its impact on investment firms. The proposed amendments would “require client identifiers on each order sent to a marketplace and on each trade in debt securities reported to IIROC. Institutional clients would require an LEI, while an account number would be required for retail clients.”

“The proposed client identifiers would allow IIROC to better protect investors from potential market abuses,” said Victoria Pinnington, IIROC’s Senior Vice-President, Market Regulation. “We are committed to working with the industry to understand the impacts and costs of the revised proposal in order to determine the best approach to implementing the rules.” Comments on the proposal are invited by 26 September 2018.

European Union: European Securities and Markets Authority ends transitional arrangements relevant to LEI under MiFID II / MiFIR

The European Securities and Markets Authority (ESMA) confirmed on 20 June 2018 that transitional arrangements established under the European Union (EU) revised Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR), which were introduced in December 2017 “will not be further extended”. MiFID II / MiFIR took effect on 3 January 2018. The six-month temporary period, said ESMA, “will last until the 2nd July 2018, including.” On 20 December 2017, ESMA had stated that it allowed for a “period of six months that investment firms may provide a service triggering the obligation to submit a transaction report to the client, from which it did not previously obtain an LEI code, under the condition that before providing such service the investment firm obtains the necessary documentation from this client to apply for an LEI code on his behalf.” ESMA and national competent authorities “have concluded that there is no need to extend the initial six-month period granted to support the smooth introduction of the LEI requirements under MiFIR.” According to MiFIR, investment firms should obtain LEIs from their clients before providing services which would trigger related reporting obligations.

ESMA Executive Director Verena Ross: “Many stakeholders are now calling for the LEI to be the standard pan-European identifier that can be used for all regulatory purposes.”

In a speech titled ‘MiFID II – an important step for the LEI’, Verena Ross, Executive Director of the European Securities and Markets Authority (ESMA) stated on 27 June 2018: “As technical as the LEI rules may appear, they are of fundamental importance to financial markets – and not only to regulators but to all investors.”

“Following the financial crisis, increasing transparency in financial markets became one of the key objectives of broader regulatory reform around the globe. MiFID II is one of the key pillars of these reforms for the EU financial markets.” ESMA Executive Director Ross also stressed that the MiFID II rules “mean that all clients of EU investment firms need to have an LEI. This has become known as the ‘no-LEI-no-Trade’ rule which prohibits EU firms to act on the instructions of a client who does not have an LEI. This means that the LEI code becomes a precondition for clients wishing to access the EU markets.”

In conclusion, she said: “I would like to emphasize that, while it requires some efforts at the beginning, the consistent use of the LEI across the various EU requirements also generates tangible benefits to the industry by reducing operational complexities, and, ultimately, decreasing compliance costs. Many stakeholders are now calling for the LEI to be the standard pan-European identifier that can be used for all regulatory purposes.”

Bank of England consults on rebuilding its Real Time Gross Settlement system including desirability of embedding the LEI – “the best corporate identifier”

In a speech delivered on 21 June 2018, Mark Carney, Governor of the Bank of England addressed, among other things, the “rebuild of the Real Time Gross Settlement (RTGS) system – the backbone of every payment in the UK.” Governor Carney pointed out that “as we overhaul the RTGS, the Bank is making it easier for the UK financial system to realize the promise of big data. The new RTGS will capture much richer data on every payment made in a format that defines international best practice. The Bank is currently consulting on how to do this, including on the desirability of embedding the best corporate identifier, the Legal Entity Identifier (LEI).”

“This will improve access to the domestic and global financial system, support greater choice and competition for the corporate end-users, and advance anti-money laundering and combating the financing of terrorism efforts,” Governor Carney added.

Center for Global Development publishes AML report: Can new technology address the de-risking dilemma?

In February 2018, the Center for Global Development (CGD) published a report titled ‘Fixing AML: Can new technology help address the de-risking dilemma?’. The report, to its author’s knowledge, is the first comprehensive effort to assess the potential of six new technologies to solve the problem of ‘de-risking’ in anti-money laundering (AML) and countering the financing of terrorism (CFT) policies, identified in a CGD report published in 2014. The technologies include KYC utilities, big data, machine learning, distributed ledger technology (DLT), biometrics and, notably, LEIs. The report asserts that these “new technologies (in use and on the horizon) may make it easier to conduct AML/CFT compliance, which in turn might tip banks’ cost-benefit calculation and make holding correspondent banking accounts with clients in poor countries more likely.”

Relative to LEIs, the CGD contends that: “A further extension of the LEI would be to include it in payment messages to identify originators and beneficiaries, which would further enhance the transparency of international payments. However, this would require changes to payment message formats and to banks’ IT systems, as well as more widespread adoption of the LEI outside of the financial sector and also in developing countries.” The report also observes that only “legal entities—financial institutions, nonfinancial corporations, government agencies, and nonprofit organizations (NPOs)—are eligible to apply for LEIs. Natural persons are not eligible […] except when they are operating in a business capacity—for example, as a sole trader. […] Because LEIs do not apply to natural persons, a separate standard is needed for identifying individuals engaging in financial transactions.” Nonetheless, in the future, "LEIs could be used to identify payment originators and beneficiaries, thus facilitating easier and more accurate KYC.”

The report also provides an overview of what regulators, policymakers and standards setting bodies are doing to facilitate the appropriate adoption of the LEI for AML/CFT, including reference to GLEIF’s campaign to encourage financing institutions to become ‘registration agents’, i.e. to help entities to access the network of LEI issuers. A useful range of policy recommendations for a variety of stakeholders, including standards-setting bodies and the ISO, together with regulators, banks and financial institutions, are also provided.

Financial Stability Board publishes progress report on addressing declines in correspondent banking

In March 2018, the FSB published a progress report on the FSB action plan to assess and address the decline in correspondent banking. The report highlights actions taken to implement the FSB’s four-point action plan since the FSB’s July 2017 update, and also emphasizes the importance of continuing to implement LEIs: “…work needs to continue to implement industry initiatives that follow up on CPMI [Committee on Payments and Market Infrastructures] recommendations, such as Know-Your-Customer utilities, the recently published option to include the Legal Entity Identifier in payment messages and the industry standards on the use of these messages.”

GLEIF engages with Financial Stability Board in second consultation on unique product identifier (UPI) governance

In April 2018, the FSB sought public comment on governance considerations for the unique product identifier (UPI), a key data element for reporting OTC derivative transactions, via a second consultation paper. The consultation builds on a 2014 feasibility study into OTC derivatives data aggregation which “noted that, irrespective of decisions on global aggregation, it is important that the work on standardization and harmonization of important data elements be completed, including through the global introduction of the legal entity identifier (LEI) and the creation of a UPI and a unique transaction identifier (UTI).”

GLEIF responded to the consultation in May 2018, providing input on a range of issues relating to funding, models of partnership and UPI reference libraries. GLEIF stated with its response to the consultation that “unique product identifiers, or UPIs, should be governed by a public-private partnership.”

GLEIF engages Data Foundation to represent it in the U.S.

In April 2018, the Data Foundation announced that it had been engaged by GLEIF to represent it in the US. “serving as a conduit for information and working to build the growing network of government agencies using the LEI to track the entities they regulate”.

The Data Foundation is the first industry-focused open data research organization in the U.S. Through research, education, and programming, the Data Foundation supports the publication of government information as standardized, open data.

With the Global LEI Index, GLEIF makes available the only global online source that provides open, standardized and high quality legal entity reference data. By doing so, GLEIF enables people, businesses and government agencies to make smarter, less costly and more reliable decisions about who to do business with. We see this impact in practice across the world. Working with the Data Foundation will help building awareness of the benefits associated with global LEI adoption and formalizing the network of partners who are working towards interoperable data standards in the US.

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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:
Compliance, Data Management, Know-Your-Customer (KYC), LEI News, LEI Regulatory Oversight Committee (LEI ROC), MiFID II / MiFIR, Over-the-Counter (OTC) Derivatives, Policy Requirements, Regulation, Standards, Unique Product Identifier (UPI)