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Legal Entity Identifier News: The April 2016 Update

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

Author: Stephan Wolf

  • Date: 2016-04-29
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  • Estimated Reading Time: 12 minutes


GovLoop, a knowledge network for government, recently commented that the Legal Entity Identifier (LEI) “promises to transform financial regulation around the world. If financial regulators adopt the LEI across all their reporting requirements, then investors, agencies, and financial companies all will benefit. Investors will be able to match a particular company’s open data filings with different regulators, instantly. Agencies will deploy analytics more cheaply. Companies will be able to match their internal data management with external reporting.”

To make it easy for stakeholders to follow global developments relevant to LEI rollout, GLEIF provides related updates via the GLEIF Blog. This blog post summarizes LEI news and market debate tracked since February 2016.

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

European Commission proposal to extend the entry into application of the revised Markets in Financial Instruments Directive, or MiFID II, should not delay firms’ LEI readiness

On 10 February 2016, the European Commission proposed granting national competent authorities and market participants one additional year to comply with the rules set out in the revised Markets in Financial Instruments Directive (MiFID II). The new deadline is 3 January 2018. According to the European Union (EU) executive body, the “reason for the extension lies in the complex technical infrastructure that needs to be set up for the MiFID II package to work effectively.”

MiFID, covering securities markets, investment firms and intermediaries, was created in response to the financial crisis to help forge a more competitive and integrated EU financial market. The revision of this legislative act was triggered by “market developments that demonstrated weaknesses in some of its underlying principles”. MiFID II, says the European Commission, aims to address these weaknesses by reinforcing and replacing the current European rules on securities markets.

In his article for DerivSource, entitled ‘MiFID Transaction Reporting: Mind the Data Gaps’, Chris Johnson of HSBC Securities Services explores how investment firms need to take early action to avoid gaps in their transaction reporting data under the upcoming MiFID II and the Regulation on Markets in Financial Instruments (MiFIR).

With regard to the LEI, he points out that the guidance from the European Securities and Markets Authority (ESMA) “is that LEIs are required in advance of trading: ‘No LEI; no trade’. MiFID II/MiFIR requires LEIs to be supplied for each of the parties involved in investment. Examples include executing entity, submitting entity, buyer, seller, transmitting firm for the buyer and transmitting form (sic) for the seller. Trading venues will require LEIs for issuers and there are also maintenance requirements for the entity that submitted the order, the client and any non-executing brokers. This means that investment firms and trading venues must obtain LEIs for multiple parties for each transaction report, must store these in their reporting system and have in place the necessary maintenance procedures.”

Chris Johnson furthermore stresses that “each of the LEIs must be ‘active’ to be eligible for transaction reporting. To remain ‘active’ the LEI must be renewed annually by its owner, rather like car tax renewal.”

“The ‘No LEI; no trade’ requirement for MiFID places a very strong incentive for firms to tackle the data requirements as soon as possible given that the required data might not be in existence yet. The logical step that can be taken by all investment firms without any delay is to measure current data availability, for the required data fields, that is already available for their held assets and current counterparties and clients, and identify the data gaps. It would be a high risk strategy to assume that others will take steps to solve the regulatory market data gaps. It is only by performing coverage checks now, and speaking to suppliers and counterparties, that firms can assess the scale of the challenge and ensure that their needs are prioritised and data gaps closed and actioned in plenty of time to deliver compliant transaction reporting.”

Canada further harmonizes derivatives trade reporting rules

As reported by BLG Borden Ladner Gervais, on 16 February 2016, the Canadian Securities Administrators announced proposed amendments to Multilateral Instrument 96-101 ‘Trade Repositories and Derivatives Data Reporting’ and the related Companion Policy 96-101CP (together, the ‘TR Rule’) published earlier this year by the securities regulatory authorities in Alberta, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon (collectively, the ‘Participating Jurisdictions’). Similar derivative trade reporting rules are already in effect in Manitoba, Ontario and Quebec (the ‘Existing Rules’). Derivatives trade reporting in the Participating Jurisdictions begins on 29 July 2016 for clearing agencies and derivatives dealers and on 1 November 2016 for other reporting parties. The comment period for the proposed amendments ended on 17 April 2016.

The proposed amendments “are substantively harmonized with the proposed amendments to the Existing Rules. In respect of British Columbia, we expect similar amendments to the TR Rule to be announced shortly.” Among other things, the proposed amendments introduce a new requirement that each eligible local counterparty to a reportable transaction obtain an LEI in accordance with the standards set by the Global LEI System. “In addition, for transactions with counterparties that are not eligible to receive an LEI, such as an individual, the reporting counterparty and the designated trade repository are required to identify a non-eligible counterparty using the same alternative identifier.”

Canada: Increased private placement reporting begins on 30 June 2016

As reported by JDSupra Business Advisor, effective 30 June 2016, “issuers will have to report prospectus-exempt distributions that settle on or after that date in any Canadian jurisdiction using a new, harmonized Form 45-106F1 (New Form), with significantly increased information requirements. Also effective June 30, 2016, annual exempt distribution trade reporting by investment funds will change from a financial year to a calendar year basis.” The New Form is the product of a two-year effort by the Canadian Securities Administrators to reform the private placement reporting regime. “The stated purpose of the New Form is to reduce the compliance burden for issuers and underwriters, facilitate more effective regulatory oversight of the exempt market and improve analysis for policy development purposes.” However, the New Report introduces significantly increased disclosure requirements. Among other things, the following new required items of identification information (if applicable) have been added to the New Form: the issuer’s LEI assigned in accordance with the standards set by the Global LEI System.

U.S Securities and Exchange Commission grants exemptions to self-regulatory organizations from certain consolidated audit trail requirements

On 2 March 2016 Wolters Kluwer Law & Business reported that the U.S. Securities and Exchange Commission (SEC) has granted the request of the 18 registered national securities exchanges and the Financial Industry Regulatory Authority (FINRA) “for exemptions from certain reporting requirements in their development of a consolidated audit trail (CAT).” The CAT national market plan, filed with the SEC on 30 September 2014, “requires every member of a national securities exchange or national securities association to record and electronically report to the Central Repository details about every order and reportable event.” The self-regulatory organizations’ (SROs’) exemptive request “relates to options market maker quotes, customer IDs, CAT reporter IDs, linking executions to specific subaccount allocations on allocation reports, and time stamp granularity.” 

“Rather than report customer IDs to the Central Repository upon the original receipt or origination of an order, the SROs proposed a customer information approach in which each broker-dealer would be required to assign a unique firm-designated identifier to each trading account. The broker-dealers would submit an initial set of information to the Central Repository to identify the customer, which would include the account type, effective date, customer’s name, address, date of birth, tax ID or social security number, the individual’s role in the account, the LEI, and the large trader ID, if applicable.”

U.S. Commodity Futures Trading Commission approved final rule eliminating certain reporting and recordkeeping requirements for trade option counterparties

As reported by Lexology, on 16 March 2016 the U.S. Commodity Futures Trading Commission (CFTC) approved a final rule eliminating certain reporting and recordkeeping requirements for trade option counterparties that are neither ‘swap dealers’ nor ‘major swap participants’ (Non-SDs/MSPs). Among other things, the final rule specifies that “a Non-SD/MSP counterparty entering into a trade option is no longer required to: (i) report the trade option on Form TO; (ii) notify the CFTC after entering into trade options exceeding 1 billion US$ in aggregate notional value; or (iii) comply with any record keeping requirements (other than obtaining and providing an LEI to any SD or MSP counterparty).” The final rule became effective on 21 March 2016.

The CFTC commented that its action addresses “the concerns of commercial end-users who rely on the derivatives markets to hedge risk—and who, we should always remember, did not cause the financial crisis. Trade options are a type of commodity option primarily used in the agricultural, energy and manufacturing sectors.” The CFTC “has finalized some amendments to its rules that recognize trade options are different from the swaps that are the focus of the Dodd-Frank reforms. These changes will reduce the burdens on these commercial businesses and allow them to better address commercial risk.”

Financial Stability Board Regional Consultative Group for the Middle East and North Africa discusses regulatory reforms

As reported by MondoVisione, on 25 April 2016 “the Saudi Arabian Monetary Agency hosted the ninth meeting of the Financial Stability Board (FSB) Regional Consultative Group for the Middle East and North Africa (RCG MENA) in Riyadh, Saudi Arabia. Members of the FSB RCG MENA began the meeting by reviewing the FSB’s 2016 policy priorities and work plan. The FSB’s current priorities are promoting the full implementation of the agreed reforms and finalising the design of the remaining post-crisis reforms that, among other objectives, aim at building more resilient financial institutions, ending too-big-to-fail [sic] and making derivatives markets safer. The FSB is also monitoring and addressing new financial vulnerabilities and risks such as those posed by market-based finance, entities misconduct, financial technology innovation, and climate-related financial risks.”

“Members concluded that financial stability may benefit from both financial inclusion and effective consumer protection and that financial education has also an important role to play in this process. Members benefited from the sharing of experiences from Saudi Arabia and Lebanon.” The meeting concluded “with a discussion on the structure and governance of the LEI system and its role in supporting authorities and market participants in the process of identifying and managing financial risks.”

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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, LEI News, MiFID II / MiFIR