The Power of Transparency: A Closer Look at LEI Renewal Rates
GLEIF updates on the state of play regarding the re-validation of LEI reference data and considers how to encourage regular LEI renewal by all registered entities
Author: Stephan Wolf
Estimated Reading Time: 17 minutes
The Global Legal Entity Identifier Foundation (GLEIF) has regularly commented on the importance of timely renewal of Legal Entity Identifiers (LEIs). Renewal means that the reference data, i.e. the publicly available information on legal entities identifiable with an LEI, is re-validated annually by the managing LEI issuer against a third party source. LEI issuing organizations – also referenced as Local Operating Units or LOUs – supply registration, renewal and other services, and act as the primary interface for legal entities wishing to obtain an LEI.
The Financial Stability Board (FSB), a key driver of the LEI initiative and founder of GLEIF, has stressed that LEI rollout should support “higher quality and accuracy of financial data overall”. The data pool’s ability to meet this objective relies on the availability of trusted and open data that is regularly re-validated. If a legal entity fails to renew and re-certify its LEI registration by the ‘Next Renewal Date’ stated with its LEI reference data, then the registration status of this LEI will be set from ‘issued’ to ‘lapsed’. As of March 2017, some 30 percent of the total LEI population has lapsed, which essentially reflects the lapsed rate we have observed since the start of 2015.
This blog post considers the impact on users of the LEI data and possible means to encourage regular renewal of the LEI reference data by all registered entities. We also take a closer look at the lapsed LEI populations across jurisdictions.
Sources cited in this blog are included in the ‘related links’ below.
Lapsed LEIs: The impact on data users
GLEIF has implemented a data quality management program that focuses on further optimizing the quality, reliability and usability of LEI data. Data quality is also ensured via the annual LEI renewal process. While the legal entity is required to notify the managing LEI issuing organization of changes to its legal entity reference data, the annual renewal process ensures that the legal entity and the LEI issuing organization review and re-validate the legal entity reference data at least once per year.
Keeping the rate of lapsed LEIs at a minimum would therefore maximize the benefit to be derived from the wealth of information available with the LEI population.
A primary user of LEI data to date is the public sector. Following the financial crisis, the goal of the drivers of the LEI initiative - the Group of 20, the FSB and many regulators around the world – was to use the LEI to create transparency in the derivative markets. To date, LEIs have been assigned to legal entities based, primarily, in the U.S. and Europe where regulations require the use of LEIs to uniquely identify counterparties to transactions in regulatory reporting. Public authorities in these jurisdictions rely on the LEI to evaluate risk, take corrective steps and, if required, minimize market abuse.
Broad LEI adoption will also generate significant advantages for the private sector. Businesses across the globe are grappling with how to develop and implement a common entity identification system that could serve as a linchpin to identify financial market participants and connect data. Alternatively, if the ‘Global LEI Index’ was established as the primary open and standardized source providing high quality entity reference data, operations could be simplified and accelerated. The Global LEI Index consists of a golden copy of all past and current LEI records including related reference data in one repository. Any interested party can easily access and search the complete LEI data pool using the web-based search tool developed by GLEIF.
Taking advantage of the Global LEI Index also allows gaining deeper insight into the global market place. If commercial counterparts – corporate customers as well as mid-size and small enterprises, providers and other business partners – could all be uniquely, easily and rapidly identified with an LEI, the resulting cost benefits and new business opportunities could be significant. For these reasons, LEI data users in the private sector have a strong incentive to insist on their counterparties maintaining their LEI in good standing. This is the only means for data users to ensure that they are dealing with the right entity.
The ability to rely on LEI data being correct and up to date should therefore be imperative – or so it could be assumed – from the perspective of public and private users.
If this were the case , then it would be in the primary interest of LEI data users to incentivize regular renewal by all LEI registrants.
In November 2015, the LEI Regulatory Oversight Committee (LEI ROC) published its progress report on the Global LEI System and regulatory uses of the LEI. In Annex 2 of the report, the LEI ROC offers definitions that could be used in regulatory language relevant to the LEI. The definition of LEI suggested by the LEI ROC for use in rules and regulations states, among other things, that the LEI “is considered current under the rules of the Global LEI System”. The LEI ROC represents public authorities from around the globe that have come together to jointly drive forward transparency within the global financial markets. In its role as overseer of GLEIF, the LEI ROC also ensures that the foundation upholds the principles of the Global LEI System.
In this scenario, the public authorities acting in individual jurisdictions that have mandated the use of the LEI might consider adapting existing and drafting new regulation to conform to the LEI ROC requirements as some more recent regulatory requirements already do.
In addition, relevant legislation could establish effective enforcement mechanisms and define a sanction regime applicable in case of non-compliance with regard to the requirement to maintain a duly renewed LEI.
With regard to applications of the LEI in the private sector, a business could specify that it will transact only with counterparties that maintain their LEI in good standing.
Consequently, legal entities that are behind schedule with their renewal risk being sanctioned for non-compliance with the applicable law or losing business, because counterparties might refuse to transact with entities that keep their LEI in lapsed status. It seems worthwhile paying the small fee for renewal to eliminate these uncertainties.
European Securities and Markets Authority confirms: MiFIR compliance requires duly renewed LEIs
Legal entities trading in the European Union (EU) should also keep in mind new regulatory requirements to apply as of next year: The revised EU Markets in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation (MiFIR) will take effect on 3 January 2018. The MiFID II/MiFIR implementing legislative acts require a significant number of actors to obtain an LEI that are under no such obligation to date. With regard to transaction reporting under MiFIR, the European Securities and Markets Authority (ESMA) has clarified that investment firms should obtain LEIs from their clients before providing services which would trigger reporting obligations in respect of transactions carried out on behalf of those clients. ESMA has also confirmed to GLEIF that compliance with MiFIR requires investment firms to maintain its own LEI duly renewed.
Recap: The obligation of a legal entity to renew its LEI annually
An identity is formed by the combined value of attributes linked to an object that distinguishes it from others. In the case of the LEI, the object is the legal entity and the attributes are that legal entity's reference data. Identity management requires the knowledge about these attribute values at a certain point in time. As these values can change over time as a result of, for example, M&A transactions, renaming of the company or head office relocation, thorough identity management requires at least periodical checks on the identity, meaning a re-confirmation of the attribute values.
If well managed, every user of the LEI can trust the underlying data and therefore does not need to re-validate this data against other sources. This is the value that the LEI system brings to identity management – trusted services and open, reliable data to uniquely identify legal entities in any financial transaction.
Through self-registration, a legal entity that wishes to obtain an LEI must supply accurate reference data to its LEI issuer. The LEI issuing organization must then verify the reference data with the local authoritative source – a national Business Register, for example – and issue an LEI compliant with the LEI standard.
The specific renewal date stated with the LEI record – as well as the fee paid by the legal entity to the LEI issuer for performing the re-validation of LEI reference data – is agreed between the legal entity and its LEI issuer.
The obligation of legal entities that have obtained an LEI to renew it regularly is a key feature that distinguishes the LEI from other identifiers for the following reasons:
Firstly, the principle of renewal is essential to ensuring that the information on a legal entity available with an LEI is accurate and up to date. No other global and open entity identification system has committed to a comparable strict regime of regular data verification.
Secondly, the users of the data are aware of whether the information related to a specific LEI has been re-validated recently or not. The Global LEI System is unique in providing absolute transparency on the timeframe when data has last been verified.
A closer look at the lapsed LEI populations across jurisdictions
On a general note it needs to be stressed that an LEI with the registration status ‘lapsed’ remains a valid LEI. The status ‘lapsed’ simply indicates that a legal entity is behind schedule with its renewal, i.e. re-validation of its information against third party sources. Since the start of 2015 the rate of lapsed LEIs has remained at about 30 percent.
It is however, important to note that the individual LEIs that make up the total lapsed population at any point in time vary considerably. At the start of 2017, GLEIF analyzed lapsed LEIs across jurisdictions with more than 1,000 LEIs. This analysis has identified distinct patterns with regard to the following metrics (applied to compare lapsed LEI rates for 2015 and 2016, respectively, on a country-by-country basis):
Issued to renewed ratio: This is the ratio of LEIs in good status at the end of 2015 that were renewed in 2016 in line with the policy applicable in the Global LEI System on regular re-validation of reference data connected to an LEI.
Lapsed to renewed ratio: This is the ratio of LEIs that already had lapsed at the end of 2015 but were renewed in 2016. In this case legal entities renewed their LEI only after the previously committed renewal date.
Issued to lapsed ratio: This is the ratio of LEIs that were in good status in 2015 and subsequently lapsed in 2016. In this case LEI registrants failed to renew their LEI within one year.
Lapsed to lapsed ratio: This is the ratio of LEIs that had already lapsed in 2015 and also failed to renew in 2016, i.e. represents legal entities that appear to have determined to remain in breach of applicable policy over an extended period of time.
The GLEIF analysis of lapsed LEI populations across jurisdictions with more than 1,000 LEIs shows the following results. The analysis is based on a comparison of 2015 versus 2016 data for the five countries, respectively, that feature the highest ratios described above:
Jurisdictions with total LEI populations higher than 1,000 with highest ratios (positive performance) *
Jurisdictions with total LEI populations higher than 1,000 with highest ratios (negative performance) *
This snapshot demonstrates the different dynamics that characterize the behavior of individual legal entities that have an LEI across the entire LEI universe as well as within one country and regardless of which LEI issuer manages the LEI. It also shows that within one country, opposing trends may be observed. In Japan, for example, we find the second highest ratio of LEIs issued in 2015 and duly renewed in 2016 as well as the second highest ratio of LEIs that had lapsed in 2015 and remained lapsed in 2016.
The role of LEI issuing organizations and GLEIF with regard to lapsed LEIs
With regard to renewal, the role of the LEI issuing organizations focuses on making available the renewal service and to remind LEI registrants on their obligation to comply with applicable policy. However, if a legal entity refuses to provide the information that the LEI issuer must verify against a third party source, then the LEI issuer is unable to perform the renewal. The policies applicable in the Global LEI System to date do not foresee a means for the LEI issuer to penalize a legal entity in any way for failing to engage in the renewal process in due time. The only action that can be performed by an LEI issuer once a renewal date has passed without re-validation of the LEI, is to set the registration status of this LEI from ‘issued’ to ‘lapsed’.
By that token, it must also be stressed that GLEIF is not in a position to sanction an LEI issuing organization based on the rate of lapsed LEIs in its portfolio. GLEIF is responsible for ensuring that each LEI issuer performs services as described in the Master Agreement, which is the contractual framework governing the relationship between GLEIF and LEI issuing organizations. There are to date no indications whatsoever that lapsed LEIs would be the result of any LEI issuer not adequately performing the renewal service. On the contrary: As demonstrated with the GLEIF analysis of lapsed LEI populations across jurisdictions with more than 1,000 LEIs based on the comparison of 2015 versus 2016 data, the LEI issuing organizations exercise due diligence vis-à-vis all registering entities. The fact that currently some 30 percent of registering entities decide to not renew their LEI on time regardless is outside the control of the individual LEI issuers.
GLEIF as well as the LEI issuing organizations can only remind legal entities that have obtained an LEI to comply with their contractual obligations and invite these to recognize also the reputational value of maintaining an LEI in good standing. This is an important matter of creating trust. In our view, there is a business case for obtaining an LEI and keeping it in good standing. So our message is this: Get an LEI and make it work for you.
Last but not least and again for the sake of transparency: It is important to highlight the fact that the lapsed LEI rate also impacts the funding model that sustains the Global LEI System. The Global LEI System is designed to encourage competition between LEI issuers to the benefit of legal entities seeking to obtain an LEI. The fees charged for the issuance and maintenance of an LEI are entirely a matter for the LEI issuing organizations and must be cost-based. GLEIF is a not-for-profit foundation which makes all its services to users available free of charge. GLEIF currently receives 19 US$ per issued or renewed LEI from the LEI issuers.
Future growth – and reducing the rate of lapsed LEIs – will allow this fee to be reduced still further.
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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.