Legal entity identifiers explained

Chris Hamblin

10 October 2017

Firms need LEIs, like other identifiers, to fulfil their reporting obligations under financial regulations and directives. LEIs are also important in the matching and aggregation of data from the markets for regulatory and other purposes. The code is linked to some vital pieces of information (name, address etc.) that relate to the legal entity in question.

Once a legal entity obtains an LEI code, that code sticks to it for its entire life.

Who needs to have one?

The use of an LEI is already required under the following regulations and directives from the European Union.

The European Markets Infrastructure Regulation (EMIR) – beneficiaries, brokers, counterparties to derivatives contracts, CCPs (central counterparty clearing houses) and clearing members must have it.
The Market Abuse Regulation (MAR) – issuers of financial instruments and entities involved or reporting in suspicious transactions must have it.
The Capital Requirements Regulation (CRR) – credit and financial institutions must have it.
The Alternative Investment Funds Directive (AIFMD) – funds and fund managers must have it.
The Credit Rating Agencies Regulation (CRAR) – credit rating agencies and rated entities must have it.
'Solvency II' – pension funds and insurance companies must have it.
The Central Securities Depositories Regulation (CSDR) – CSDs and CSDs’ participants must have it.
The Transparency Directive – issuers of financial instruments listed on regulated markets must have it.
The Securities Financing Transactions Regulation (SFTR) – parties involved in securities financing transactions and the beneficiaries of the rights and obligations arising from them must have it.

It is also to be needed under the EU's Markets in Financial Instruments Directive, which comes into force in January. Jonathan Wilson of Cordium recently told Compliance Matters: "The rules state that LEIs must be provided on the required transactions for all entities involved in the transaction, including the buyer, seller, entity executing the transaction and any transmitting entities. Wealth managers will therefore need to populate LEIs for their clients."

LEIs for wealth managers

He went on: "In theory, these LEIs should be obtained by the clients and passed on to the wealth manager. However, wealth managers are finding this challenging, especially when it comes to 'educating' clients about why this is necessary and obtaining the LEI information in good time to provide services to them. We know of firms that have taken it upon themselves to obtain LEIs on behalf of their clients – in some cases charging a fee for this – to ensure compliance. However, this will also involve the firm having to renew the LEI annually, which itself comes at a cost and creates resourcing problems for wealth managers.

"The incorporation of LEI details into transaction reports by 3rd January will be just one of the many technical things that firms have to do. Some wealth managers are choosing to outsource the process of MiFID II transaction reporting, though there will be limits on how far they can delegate responsibility for the information that is submitted. Firms should ensure that they can continue to support MiFID II transaction reports after the starting date in case of any errors that ought to be corrected, or cancellations that ought to be made."