Legal Entity Identifier

A Legal Entity Identifier (or LEI) is a 20-character identifier that identifies distinct legal entities that engage in financial transactions. It is defined by ISO 17442.^[1] Natural persons are not required to have an LEI; they’re eligible to have one issued, however, but only if they act in an independent business capacity.^[2] The LEI is a global standard, designed to be non-proprietary data that is freely accessible to all.^[3] As of October 2017, over 630,000 legal entities from more than 195 countries have now been issued with LEIs.^[4]

History

At the time of the 2008 financial crisis, a single identification code unique to each financial institution was unavailable worldwide. It means that each country had different code systems to recognize the counterpart corporation of financial transactions. Accordingly, it was impossible to identify the transaction details of individual corporations, identify the counterpart of financial transactions, and calculate the total risk amount. This resulted in difficulties in estimating individual corporations's amount of the risk exposure, analyzing risks across the market, and resolving the failing financial institutions. This is one of the factors that made it difficult for the early evolution of the financial crisis. The LEI system was developed by the 2011 G20,^[5] in response to these inability of financial institutions to identify organisations uniquely, so that their financial transactions in different national jurisdictions can be fully tracked.^[6] Currently, the ROC (Regulatory Oversight Committee), a coalition of financial regulators and central banks across the country, is encouraging the expansion of the LEI. Currently, the U.S. and European countries require corporations to use the legal entity identifier when reporting the details of transactions with over-the-counter derivatives to financial authorities. The first LEIs were issued in December 2012.^[7]

Code structure

The technical specification for LEI is ISO 17442.^[6] An LEI consists of a 20-character alphanumeric string, with the first 4 characters identifying the Local Operating Unit (LOU) that issued the LEI. Characters 5 and 6 are reserved as '00'. Characters 7-18 are the unique alphanumeric string assigned to the organisation by the LOU. The final 2 characters are checksum digits.^[8]

Global Operating System^[9]

• G-20 : An international organization consisting of representing 20 major countries(90 percent of the world's GDP) like seven developed countries(G7), the chair countries of the European Union, and twelve rising nations.
• FSB(Financial Stability Board) : An organization founded to enhance the stability of the global financial system and to oversee international finance.
• LEI ROC(Regulatory Oversight Committee) : The best decision making organization for LEI Systems under FSB. The 40 countries ' financial authorities, the central bank, and IMF are represented as members by international organizations.
• GLEIF(Global LEI Foundation) : It is responsible for controlling the LOUs in each region as a practical operating organization within the LEI system.
• LOU(Local Operating Unit) : As the operating organization for issuing and maintaining the LEI code in each region, 31 LOU are currently active worldwide.

Need of LEI^[10]

• Who should have LEI?

Both corporations and funds involved in financial transactions need the LEI. LEI is an identification code designed to recognize all of the entities and funds involved in financial transactions worldwide.Therefore, all corporations and funds that participate in financial transactions should be issued LEI.

• When does it need?

In the United States and Europe, the parties to the transactions must use the LEI to report to the supervisory authorities any out-of-books derivatives transactions. Recently, it has expanded their coverage such as alternative investments, fund investments, insurance, spot markets, pensions, logistics and bids.

Obtaining a Legal Entity Identifier (LEI)

The Global Legal Entity Identifier Foundation (GLEIF) is not directly issuing Legal Entity Identifiers, but instead it delegates this responsibility to Local Operating Units (LOUs). These LEI issuers supply different services. Local Operating Units can have different prices for the registration services they offer. GLEIF is responsible for monitoring LEI data quality.^[11]

Advantages of LEI

• In financial transactions, you can reduce the risk associated with the counterpart. You can measure the total risk of the other party. You can also determine the risk of a particular trading partner's concentration.

• You can reduce the cost of reporting tasks. Financial transactions reduce the costs of information gathering and administrative costs to the other party. You can also reduce the cost of various reporting tasks, such as reporting the details of out-of-court derivatives transactions and reporting of the regeneration and cleanup plans.

• You can enhance market transparency. As LEI is a code of international currency, it is easy to detect market manipulation, financial fraud and other disruption acts through the sharing of international financial transaction information.

See also

• Business Entity Identifier (ISO 9362)
• Reference data

References

External links

• Official ISO standard