Why LEI Is Not Just a Formal Requirement
Many companies first encounter the LEI code when a bank, broker, or another financial service provider tells them they need one. The requirement often feels like another formal step before a transaction can move forward. From a company’s perspective, the LEI may seem like just a number without clear practical value.
In reality, the Legal Entity Identifier (LEI) serves as a global identifier for legal entities. Financial markets and regulators around the world rely on it. The European Union adopted the LEI widely because it links transactions, counterparties, and risks in a clear and machine-readable way. This structure allows authorities to supervise markets automatically, across borders, and at scale.
Why Companies in the EU Must Have an LEI
Financial markets in the European Union handle a large volume of transactions involving legal entities. These transactions include more than buying and selling shares. Market participants trade derivatives, arrange securities financing transactions, provide financial collateral, and execute cross-border and real-time payments.
Supervisory authorities need more than confirmation that a transaction occurred. They need to know who participated, whether those parties operate in multiple countries, which instruments they use, and how much risk they take. Without a standardized identifier, authorities cannot reliably connect this information.
Company names do not solve this problem. Names can look similar, change over time, or differ across languages. The LEI removes this ambiguity. It gives each legal entity a standardized and machine-readable identifier that authorities and market participants use consistently across the European Union.
What Happens After a Company Obtains an LEI
The LEI is not a separate document that a company submits to a regulator. Instead, the LEI works at the transaction level. When a company participates in a transaction that falls under reporting obligations, the reporting entity includes the LEI in the transaction data.
From that moment, the LEI travels with the transaction data throughout the supervisory chain. It acts as a key that links information from different sources. The company does not need to take additional action. However, the LEI plays a central role within the regulatory system.
How Banks and Service Providers Use the LEI in Practice
In the European Union, companies usually do not report their own transactions. Banks, investment firms, and other regulated service providers report on their behalf. Regulations such as MiFID II, MiFIR, EMIR, and SFTR define which transactions must be reported and in what format.
The service provider collects the transaction details, adds the LEI codes of the counterparties, and submits the report to the supervisory system. The LEI forms a mandatory data element in many cases. If the LEI is missing, expired, or inconsistent with registry data, the report does not meet technical requirements. As a result, the system cannot process the transaction correctly.
Where Transaction Data Flows in the EU and How the LEI Supports It
In most cases, financial institutions first report transactions to the national supervisory authority of the country where they operate. The national authority collects and validates the reports. It checks technical compliance and forwards the data to EU-level systems, depending on the regulation and transaction type.
At the European level, authorities do not centralize all data in one single system. Instead, different institutions handle different data sets based on their mandates.
For securities transactions, market transparency, and market abuse supervision, data flows primarily into the systems of the European Securities and Markets Authority (ESMA). ESMA uses the LEI to connect the activities of the same legal entity across trading venues and Member States. This approach allows ESMA to detect patterns and risks that a single country might not identify on its own. Reports under MiFID II and MiFIR, as well as data from investment firms and trading venues, fall within this supervisory framework.
In the banking and payments context, supervisory frameworks at the European Central Bank rely on aggregated data to assess systemic risk, financial stability, and cross-border capital flows. Banks and payment service providers supply the underlying transaction data. The LEI enables supervisors to consolidate information at the level of the legal entity, even when transactions occur through different banks in different member states.
The European Banking Authority plays a key role in shaping supervisory standards and technical rules. Although the EBA does not collect individual transaction reports for operational supervision, it defines regulatory frameworks and technical standards that govern how banks and authorities implement the LEI in practice.
The LEI does not serve as a standalone anti-money laundering tool. However, it supports compliance and risk-based supervision. The LEI links transactions to specific legal entities, even when those entities operate in multiple jurisdictions or use multiple service providers. This structure supports AML analysis because authorities can assess suspicious patterns at the entity level instead of relying only on names or account numbers. The LEI makes such analysis technically possible and scalable across the European Union.
LEI in EU Payment Frameworks and VoP
The role of the LEI continues to expand beyond traditional securities and derivatives reporting. The European Union has introduced new requirements to improve the speed, security, and transparency of payments, particularly in cross-border and instant payment environments.
One key development is Verification of Payee (VoP). Under this framework, payment service providers must verify whether the payee’s name matches the actual account holder before executing a payment. This reduces fraud and processing errors and allows payment systems to operate in a more automated and reliable way.
These requirements form part of the EU Instant Payments Regulation (Regulation (EU) 2024/886), which establishes the legal framework for instant credit transfers in euro across the European Union.
When companies act as payment counterparties, the LEI supports unambiguous legal entity identification. It enables structured and machine-readable matching across jurisdictions and financial institutions. In this way, the LEI integrates into the broader EU payment infrastructure rather than functioning as an isolated reporting element.
Why Certain Transactions Cannot Proceed Without an LEI
The EU supervisory system relies on automated and machine-readable data processing. Without the LEI, authorities cannot consolidate and compare transactions at the legal entity level in a reliable way. Supervisors would need to rely on manual processes, which would increase errors and create opportunities for abuse.
For this reason, obtaining a valid LEI number becomes a prerequisite for many regulated transactions. A transaction either meets the technical and regulatory requirements, including a valid LEI where required, or the system cannot process it properly.
Conclusion
For a company, the LEI may appear as an obligation required to complete a transaction. From the perspective of the European Union, however, the LEI forms part of the operational infrastructure of the financial system. It enables automated supervision, cross-border data integration, and more effective risk assessment.
The LEI is not just a number. It serves as a practical tool that allows banks and regulators to monitor financial markets consistently and reliably.