The Legal Entity Identifier (LEI) is a reference code – like a barcode – that is used in all markets and jurisdictions to uniquely identify a legally distinct entity involved in a financial transaction. The LEI is designed to be the hub for financial data – the first global and unique entity identifier that allows risk managers and regulators to instantly and accurately identify parties to financial transactions. For example, a large international bank may have an LEI that identifies the parent company, as well as an LEI for each of its entities that buy or sell stocks, bonds, swaps or other transactions in the capital markets. One of the most important aspects of the open data initiative is the ability to identify the entities to which the information relates. In this context, the LEI is the only fully open source existing identifier that can be used for this purpose. In addition, it is also the only existing and clearly defined data standard that is already accepted by the Data Coalition (www.datacoalition.org/news/video/) as one of the pillars of the Financial Transparency Act: since August 2012, DTCC and SWIFT have been offering a preliminary solution for global legal entity identification, the CFTC Interim Compliant Identifier (ICCI). In October 2013, the pre-LEI or CICI of the public service CICI were approved by the ROC for use in global reporting across asset classes and for extended use of these identifiers beyond reporting to trade repositories. In December 2013, CICI Utility was renamed GMEI Utility to reflect its broad international reach. The working groups made proposals and recommendations regarding global governance and oversight, a funding model, a revenue model for self-registration and self-validation, and an operating model that is evolving towards a fully federated architecture and a corporate and legal structure for the LEI system itself. Publicly available LEI data includes information such as the name of the legal entity, jurisdiction, registrar, LEI registration date, and legal entity status. These are all level 1 data that answer the question “Who`s who?” Level 2 data provide information on parental relationships in business structures and describe parent companies and subsidiaries.
Level 2 data is intended to answer the question “Who owns whom?” In addition, data on the initial registration date, last update and renewal date of the LEI code, as well as the registration status and management of the LOU, can also be found in the LEI reference data. There are a few scenarios in which you need to specify your LEI. If you are involved in a financial transaction, such as borrowing money or trading securities, you need an LEI. In terms of borrowing, the LEI is used to identify the borrowing company and its creditworthiness. When it comes to securities trading, the LEI is used to track who buys and sells which securities. The LEI is also required for any company that wishes to list its shares on the stock exchange. Currently, LEIs are mandatory for all banks, large and small, insurance companies, brokerage firms, investment firms, credit unions and all other companies operating in the financial market. Currently, there are about 100 regulations in various jurisdictions where the use of LEI codes is required.
The other part of the baseline, the “level 2” data, answers the question “Who owns whom?” Where appropriate, it allows the identification of the direct and ultimate parent companies of a legal entity. The private sector has made several attempts over the past 20 years to establish a global legal entity identification system, but it is not in a position to achieve the coordination necessary to implement a single global solution. In the aftermath of the 2007-2009 financial crisis, the leaders of the world`s largest economies, through the G-20 and the Financial Stability Board (FSB), agreed to develop a coordinated solution to overcome these challenges. These efforts resulted in a public interest initiative that is now the Global LEI System. Each LEI is a 20-digit alphanumeric code and an associated set of reference data elements for the unique identification of a legally distinct entity operating in financial markets. This global standard complies with the 2020 specifications of the International Organization for Standardization (ISO), as documented in ISO 17442-1:2020, Legal Entity Identifier (LEI). The purpose of the LEI is therefore simple, it helps you to identify legal entities free of charge in a database accessible worldwide. This leads to greater security in international transactions, shortcuts to Know Your Customer (KYC) processes and all this while increasing transparency throughout the global financial system.
What makes the global LEI system reliable in the long run is the requirement to renew LEI codes annually.
