From tightly-regulated industries that require LEI codes to be compliant with regulations to more private sectors, the global LEI system is quickly becoming a standard for authenticating business partners. In fact, banks and financial service companies now incorporate LEI checks into their KYC standards.
LEI adoption can bring efficiencies to regulatory reporting by eliminating duplicated identifiers across agencies. Consistent entity identification can also help regulators trace connections between entities, paint a clear picture of supply chains, and make government procurement more efficient.
1. Insurance
The LEI system was born out of the need for a global identifier for financial market participants. The 2008 financial crisis demonstrated the need for a single, globally unique identifier that can identify the legal entities on each side of any financial transaction instantly and precisely. Until the launch of the LEI, each country had its own system for identifying corporations and tracing their connections to other companies. This made it impossible to quickly identify and understand the full extent of a firm’s exposure during a meltdown.
Luckily, the LEI is here to solve these problems. The LEI is a 20-character alphanumeric code that uniquely identifies an entity, such as a corporation, partnership, trust or other type of company. It also provides a link to a public directory of all LEI registrants and their information. The LEI makes it easier for regulated financial institutions and other market participants to comply with regulatory reporting requirements.
It also reduces the costs associated with collecting, aggregating and maintaining data. And it increases the efficiency of due diligence and KYC processes. Ultimately, the global LEI will improve transparency and make the world’s economy healthier and safer. Many markets and regulators have already adopted the LEI and are requiring or encouraging its use.
2. Banking
Nothing exemplifies the need for a global, unique identifier system better than the collapse of Lehman Brothers in 2008. The financial crisis showed that we needed a way to identify entities across markets and jurisdictions. Previously, each country had its own code systems that made it difficult to identify the counterpart corporations in large financial transactions and markets.
LEI codes, referred to as Legal Entity Identifiers (LEI), are the first globally recognized identifiers for all types of legal entities involved in regulated financial transactions and markets. They are like a bar code that contains reference data, including ownership, location, type of business, and more. They help to make more accurate risk assessments and lower costs by eliminating the need to translate and consolidate information in different databases.
Banks use LEI codes to streamline onboarding for new clients, and they can be linked to International Securities Identification Numbers (ISIN) in a process called LEI to ISIN mapping. They also reduce the cost and time of submitting regulatory reports by providing a common set of reference data that is used to consistently identify entities. The 184 global regulators that mandate LEIs have a strong incentive to support the widespread adoption of this important data standard, which enhances transparency and helps reduce systemic risk in the world’s financial systems.
3. Energy
The LEI is uniquely suited to serve as the global standard for entity identification as shown on the lei-code homepage. It is non-proprietary, built on open data principles, and is verified to a high standard. It can be used to connect data across systems, agencies, industries, and borders. In fact, many regulated entities already use the LEI to replace their internal identification numbers in regulatory filings.
If the United States embraces a single, overarching system of identification for all legal entities, agencies will save time and money by eliminating duplication of effort in collecting, matching, and reporting on information that can be gathered from a single source. For example, the Federal Energy Regulatory Commission currently uses three different systems to identify and track companies that it regulates.
Embracing the LEI would also enable agencies to better understand global corporate hierarchies, a crucial requirement in evaluating risk in financial markets and in tackling long-standing law enforcement priorities that are made more difficult by complex corporate structures (e.g. terrorism financing, money laundering, tax inversion, etc). This isn’t just a benefit for the financial industry: consistent entity identification could also help improve supply chain transparency and reduce costs for product-based businesses. For instance, integrating LEI with the global data system that issues barcodes would make it easier to see which entities touch products throughout the supply chain.
4. Healthcare
In the aftermath of the financial crisis, leaders of the world’s largest economies came together and agreed on a global solution to legally identify organizations engaged in financial transactions. That solution was the Legal Entity Identifier, better known as LEI codes.
Any regulated entity participating in the financial markets can obtain an LEI code, which gets indexed on the publicly available LEI directory. From a business perspective, the LEI offers much-needed transparency by answering questions such as ‘who is who’ and ‘what does this mean?’
The 20-character alphanumeric code is agnostic to company names and jurisdictions, and links to reference data that enables clear identification of entities worldwide. LEI data pools answer important questions like ‘who owns whom’, which helps to address concerns around corporate governance and reduce risks of financial crime such as money laundering and fraud.
The LEI is managed by a network of Local Operating Units (LOUs), accredited by the GLEIF to issue and renew LEIs as well as act as custodians of the global directory of LEI-registered entities. LOUs are typically financial exchanges or financial data vendors, and most are members of the GLEIF. Unlike other identifiers, LEIs do not expire and are verified annually through a validation process that requires a submission of key information about the relevant entity.
5. Technology
In the technology sector, LEIs can help to streamline a number of processes. In particular, it can facilitate the “Know Your Customer” process and expedite client onboarding. Additionally, it can help to reduce the amount of duplicated work that is required due to multiple identifiers being used.
The global financial crisis a decade ago drove home the need for a system that could identify and link data to legal entities on both sides of a transaction. That led to the creation of the LEI code.
A 20-character alpha-numeric code based on ISO 17442 standards, an LEI identifies an individual company on a global database of companies. It also offers public, accurate data about a company that is easily accessible and free to use.
LEIs are a critical component of the post-trade process, helping to ensure that trade data is linked correctly and in real-time. This can help to reduce costs associated with a number of different areas including settling trades, regulatory reporting and compliance, and data management. Furthermore, it can help to speed up the trade lifecycle by reducing the number of touchpoints. Additionally, it can help to reduce the risk of error by ensuring that the right information is passed to the correct party.
6. Real Estate
Anyone that trades in funds, stocks, bonds, currencies or any other financial assets needs to have an LEI. This applies to everyone from private companies and big banks all the way down to individual traders and farmers’ cooperatives. This is because the global LEI database is a key to worldwide standardized data that can be verified, and that helps businesses lower their counterparty risk.
It allows a better understanding of who you are dealing with, their parent entities and more. The data is accessible and easily updated. It also enables greater transparency for the financial market. Moreover, it can support enhanced risk management, increased operational efficiency and reduced cost.
The LEI code is a unique alphanumeric 20-character code that references the following two main reference data points: Level 1 — who is who; and Level 2 — who owns whom. This public data pool can be accessed and used by everyone and is a key to global transparency in the financial markets. Additionally, it enables compliance with international regulations in a fast and consistent manner. The ROC is working to ensure that the LEI system is fully implemented in all jurisdictions. Currently, there are many regulations that request or require the use of LEIs.
7. Transportation
The transportation industry benefits most from using LEI codes due to the transparency and safety it brings. An LEI code is a unique 20-character alpha-numeric code that connects to key reference information and enables clear identification of legal entities participating in regulated financial transactions and markets worldwide. It is a requirement of many regulations across the globe including (but not limited to) EMIR, MiFIR, MIFID II, SFTR and CSDR.
LEI codes enable a more efficient, less costly way to identify businesses and make business decisions. They allow companies to link data sets, improving analysis and allowing for a better understanding of a company’s financial standing. In addition, they provide a level of transparency that is critical to ensuring business compliance with regulation and increasing overall efficiency.
Regulated financial institutions and companies involved in trading activities are often required to obtain an LEI in order to comply with various regulations such as EMIR, MiFIR, MIFID 2, SFTR and CSDR. However, the use of LEI codes is rapidly expanding and it will not be long before regular businesses are also required to have one.
About Author
