Why is LEI Essential for Global Trade?
To understand who needs a Legal Entity Identifier (LEI), we first need to understand why the LEI is necessary. The global demand for an identifier like the LEI has existed for decades. As global trade expanded rapidly in the 1900s, there arose a need for transaction transparency and increased trust, especially across borders.
Previously, there was no universal identifier for all legal entities across various industries, including companies, funds, and governments. This gap is why LEI codes are required.
When capital markets and banking went digital, the need for a common identifier became even more critical. Identifying corporate ownership became complicated, with companies owning other companies, leading to confusion about who was who. This confusion contributed to famous fraud cases and facilitated the concealment of ‘dirty’ money between organizations. It also made it challenging for banks and other institutions to onboard new clients, as Know Your Customer (KYC) practices relied on outdated and fragmented data.
Registry information was difficult to access and needed consolidation into a single database. Without a reliable identifier, onboarding new clients and confirming their identities became laborious and costly. Research by McKinsey estimates that LEIs could save banks up to $2-4 billion annually in KYC processes.
History of the LEI
The 2008 market crash highlighted significant transparency issues in identifying transaction counterparties. The crash left thousands of funds and trusts unidentifiable, causing widespread confusion and vulnerability among financial institutions and banks.
This issue was addressed at the G20 Summit in June 2011, where the concept of the LEI was created. The goal was to establish a digital database of all legal entities that is easily accessible, reliable, and up-to-date.
What is an LEI Number Used For?
LEI codes are used to identify legal entities on a global scale, providing transparency in financial markets, standardization, and better risk control. According to the LEI Regulatory Oversight Committee (ROC), the LEI was designed to help the private sector with improved risk management, increased operational efficiency, more accurate exposure calculations, and other needs.
The LEI system offers a centralized source of high-quality, accessible data.
What is an LEI Number?
An LEI, or Legal Entity Identifier, is a unique 20-digit alphanumeric code. Its purpose is to provide regulated identification for legal entities, such as businesses and organizations, particularly in the financial industry.
The goal of the LEI system is to enhance transparency and connectivity of data regarding legal entities, thereby reducing financial risks when dealing with such entities globally. For more information on what an LEI is, click here.
Financial Institutions that Always Require an LEI Number
Currently, financial institutions such as brokerages, banks, investment companies, insurance companies, and credit unions always require an LEI. LEI System is dedicated to assisting you through the LEI registration process.
However, individuals do not need an LEI to trade on the financial market. Therefore, if you are not a company or corporation, you do not need an LEI at this time.
Investment Firms and Their Clients (EU)
Investment firms and their clients in the EU are another category that requires an LEI, due to the MiFID II/MiFiR regulations that became law in January 2018. EU authorities must refuse trades between investment firms and their clients unless both parties have an LEI number. This situation is commonly referred to as “no LEI, no trade.” If your organization is subject to these MiFID II/MiFiR requirements, you can apply for an LEI through LEI System.
Government Agencies (USA)
In the USA, many government financial agencies also require an LEI, as mandated by the Office of Financial Research. These agencies include the Federal Reserve System (FED), the Commodity Futures Trading Commission (CFTC), and the National Association of Insurance Commissioners (NAIC). LEI System offers convenient and fast LEI number registration in the US market as well.
RTOs and ISOs
Since 2015, US government entities outside the finance sector, such as the Federal Energy Regulatory Commission (FERC), have required LEIs. FERC mandates that all Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) have an LEI.
LEI for trusts and similar entities
Even though trusts are not legal entities in the traditional sense, many jurisdictions require them to obtain an LEI — especially when they engage in financial transactions.
Learn more about LEI for trusts here.
Entities Affected by the Financial Transparency Act
Finally, it is important to note that additional entities may soon be required to use LEIs. The proposed U.S. Regtech Law and the Financial Transparency Act, if passed, will require all data gathered by such agencies to be unrestricted. This aims to make transactions and regulatory oversight more reliable.
LEIs are an ideal method of identification for such data, so any entity dealing with the regulatory agencies listed here is likely to need an LEI in the near future.
