In June 2012, the Financial Stability Board (FSB) published its report, A Global Legal Identifier for Financial Markets which set out its recommendations and proposals to overcome the weaknesses in financial reporting by identifying participants in any financial transaction. On 28 May 2019 the FSB published the Thematic Review on Implementation of the Legal Entity Identifier. This is a peer review report on the implementation of the Legal Entity Identifier (LEI) and expresses a continued commitment to the wider use of the LEI globally. The FSB formulated four sets of recommendations to accomplish the G20’s objective of broader LEI adoption.
The FSB recommendations have a direct or indirect impact on several functions of central banks. They are summarized as follows:
The 24 FSB jurisdictions should follow up on the relevant Committee on Payments and Market Infrastructures (CPMI) - International Organization of Securities Commissions (IOSCO) guidance, consider use of the LEI in reporting or disclosure frameworks and for (financial market) infrastructures, explore ways to promote further LEI adoption through nationwide adoption strategies. This includes leading by example in obtaining LEIs for the central banks.
The FSB will explore the potential role of the LEI in its work, facilitate the effective implementation of the LEI option in payment messages to help address the decline in correspondent banking relationships, and work with standard-setting and industry bodies to facilitate adoption of the LEI.
The standard-setting bodies, such as CPMI and the Basel Committee on Banking Supervision (BCBS), as well as international organizations, such as the World Bank, Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF), should review and consider ways to embed the LEI in their policies. This could involve guidance and promotion of LEI usage in securities transactions and cross-border payments.
The LEI Regulatory Oversight Committee (LEI ROC) and GLEIF should consider enhancements to the LEI business model to lower the costs and administrative burden for registrants, and to expand coverage by conducting LEI adoption campaigns for large multinational firms.
GLEIF services for central banks
GLEIF meets its objectives by offering a broad range of data services to LEI data users, including central banks. These services are summarized below.
Core services cover the access and use of LEI data. This includes Level 1 data (‘who is who’) and Level 2 data (‘who owns whom’).
Level 1 data: Who is who: Since the global LEI system was endorsed by the G20 in 2012, over 1.4 million registrants in over 200 countries have registered for an LEI. For more detailed information on LEIs issued and other key facts and figures, see LEI Search and LEI Statistics.
Level 2 data: Who owns whom: This GLEIF service delivers clarity on the direct and ultimate parents and children of a legal entity with an LEI. This is based on the International Financial Reporting Standards (IFRS) or the United States’ Generally Accepted Accounting Principles (GAAP), as mandated by the LEI ROC policy.
GLEIF additionally provides the following services for users:
Publication of the GLEIF Registration Authorities List. This is an overview of approximately 700 business registers that assigns a unique code to each register on the list.
The LEI-to-BIC ISO 9362 mapping service for accepted legal jurisdictions.
The LEI-to-ISIN ISO 6166 mapping service for shares and bonds, in cooperation with the Association of National Numbering Agencies (ANNA), planned to be completed in 2019/2020.
An overview of all legal forms of any country based on the ISO 20275 ELF standard for entity legal forms – via the ISO 20275: Entity Legal Form Code List - which is planned for completion in 2019.
In many jurisdictions around the globe, public authorities rely on the LEI to evaluate risk, take corrective steps and, if required, minimize market abuse and improve the accuracy of financial data. However, GLEIF has no mandate to define the strategy for the use of the LEI by the public sector based on article 10 of the GLEIF Statutes. LEI data is already used for many public purposes such as for reporting to regulators and statistical purposes.
GLEIF publishes a regularly updated overview related to Regulatory Use of the LEI, which provides a summary of more than 100 current and proposed regulatory activities which include the use of the LEI.
GLEIF has formulated a strategy for the use of the LEI by the private sector that includes, but is not limited to:
Capital and money markets (supported by legislation): GLEIF has approached all trade associations active in capital and money markets with a request for cooperation. GLEIF has created LEI-user stakeholder groups, such as the Globally Important Financial Institutions (GIFI) Relationship Group.
Banking services: Services for trade finance, cross-border payments (to mitigate money laundering and terrorist financing (ML/TF) and sanction risks) and for on-boarding customers. The Bank for International Settlements (BIS), BCBS and CPMI committees have delivered a policy for the LEI for cross-border payments.
Supply chains: In relation to supply chains, GLEIF has a strong cooperation with GS1, an LEI issuer, and with the International Chamber of Commerce (ICC), which counts 45 million companies as members. The ICC Chairman provided a recommendation to the G20 leaders in November 2018 to include the LEI in the (financial) supply chain to improve transparency and efficiency and to mitigate anti-money laundering (AML) and counter financing of terrorism (CFT) risks.
Digital economy: This includes the LEI for e-commerce, blockchain arrangements, smart contracts, certification authorities, the ITU X509 protocol, and for fintech firms. GLEIF has a dialogue with several industry organisations, such as the Certification Authority (CA) / Browser Forum.
With the support of a global consultant firm, a research initiative is now underway to investigate how a substantial increase in LEI issuance may be possible. The resulting report is planned for release before end-2019.
The value of the LEI for central banks
The LEI can support the following five central bank functions.
Oversight of payment systems of financial market infrastructures (FMIs)
The ISO 17442 LEI is a “relevant internationally accepted communication standard” that meets the requirement of the Principles for Financial Market Infrastructures (PFMI) Principle 22 to facilitate efficient payment, clearing, and settlement for financial market infrastructures (FMIs). The FSB Thematic Review on Implementation of the Legal Entity Identifier recommends that policymakers should consider including the LEI in cross-border payment transactions.
Select central banks (European Central Bank and the Bank of England) require participants of their real-time gross settlement (RTGS) system to have a LEI. They now require that a LEI is included in the payment settlement messages based on the ISO 20022 standard. The GLEIF LEI-2-ISIN service facilitates the collateral management of central banks.
Supervision of banks
In a step towards facilitating global trust, some central banks require XBRL messages for regulatory reporting inclusive of the LEI. XBRL, or eXtensible Business Reporting Language, is an open international standard for digital business reporting. Recently, GLEIF and XBRL cooperated to include the LEI in the XBRL standard and for iXBRL reports.
The Committee on Monetary, Financial and Balance of Payments Statistics (CMFB) is a strong supporter of the LEI initiative and is promoting the universal use of LEI for global entity identification purposes. CMFB is now cooperating with GLEIF to determine how the LEI could be best included in datasets.
Central banks are involved in open market operations and need to understand the data of their counterparty (inclusive of changes of data elements during the duration of the contract).
Please note that this article was recently published in Central Banks Payment News.
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Gerard Hartsink was appointed by the Financial Stability Board as Chairman of the GLEIF Board. The profiles of Gerard Hartsink and all other members of the GLEIF Board of Directors are available on the GLEIF website.