The LEI is on everyone’s lips. If the GLEIF (Global Legal Entity Identifier Foundation) website was compared to an international lifestyle column, the LEI would be the new IT piece of the season. Everyone is rushing to apply in time for an LEI and to not miss the new requirement of the financial market.
The 20-digit, alpha-numeric code spreads relentlessly through the world since, as of 3 January 2018, all companies wishing to continue to take part in the derivative market in Europe will be required to be in possession of an LEI.
The European Union is particularly committed to the introduction of the LEI and passed a corresponding directive applying to numerous companies based in Europe. However, what about companies that do not sitting in Europe? What is the impact of the introduction of the LEI in the international context?
The use of an LEI codes is prescribed by various regulations. These include the Dodd-Frank Act which promotes financial stability and consumer protection in the United States, as well as the European Market Infrastructure Regulations (EMIR) or the forthcoming revised EU Directive on Markets in Financial Instruments (MiFID II), and the accompanying MiFIR regulation. By the end of June 2017, 520,000 LEI have been issued to legal entities, most of them are based in the USA and the European Union.
Let us take a look at some countries where a strong LEI trend is emerging.
In Canada, the Investment Industry Regulatory Organization of Canada (IIROC) proposed in June 2017 to make the LEI mandatory for orders. The primary objective is to improve market integrity and investor protection.
In the Traders Magazine, Doug Clark, Head of Market Structure Research at ITG Canada, commented the LEI: “IIROC has had something close to Consolidated Audit Trail (CAT) data, directly from the exchanges, for almost a decade, for secondary equity market trading. They have used this for market surveillance and academic-style studies of market quality. Recently, they have proposed adding LEI’s to orders."
According to IIROC, the LEI should be used more broadly, notably for the development of back office systems.
In the United Kingdom, since 1 October 2017, all issuers of securities admitted to an EU regulated market must have an LEI.
At that date, new rules in Chapter 6 of the Disclosure Guidance and Transparency Rules came into force. These stipulates that an issuer is obliged to declare an LEI and to classify regulated information according to the delegated regulation categories when it submits information to the FCS (Financial Conduct Authority) in the course of its statutory reporting obligations.
Asian countries are also on the move and respond to the LEI introduction.
Thousands of business partners in Asia are on high alert since without LEI they neither will no longer be able to, inter alia, carry out global banking transactions and this already from January 2018. The MiFID II guideline has a direct impact on all companies trading within the European Economic Area (EEA). Third country partners are therefore also equally affected by the regulation.
From January 2018, any legal entity subject to MiFID II will be prohibited from trading with business partners who do not possess an LEI. It is irrelevant whether the company is based within or outside Europe.
In this context, the International Swaps and Derivatives Association (ISDA) estimates that up to ten thousand Asian organizations will need an LEI if they, inter alia, want to continue to trade with European banks. For the moment, less than 5% of the 530,000 LEI issued globally come from Asian region.
India and Singapore are currently the only countries in Asia that enacted an LEI obligation for derivative transactions, however Hong Kong and Australia are also promoting the LEI trend.
In brief, a strong movement in favour of the LEI can be stated in many countries in Asia. The KRX (Korean exchange) has already established a commercial register with the intention of integrating the LEI in the future.
In India, the LEI already plays a central role. The President of the Reserve Bank of India, T. Rabi Sankar, announced in June 2017 that the LEI system will be implemented “for all participants in the Over-the-Counter (OTC) markets for Rupee Interest Rate derivatives, foreign currency derivatives and credit derivatives in India in a phased manner.
”Wenling Juang, head of Thomson Reuters' ‘Pricing and Reference Services’ in Asia, estimates that the closer the deadline for MiFID II, the more the LEI trend in Asia will get similar to its developments in the European market.
Given the rising interest for the LEI in India, LOU (Local Operating Units, that is the LEI issuing organizations) already register a significant increase in LEI applications.
Anupam Mitra, Head of Derivatives within the trade repository and LOU of the Clearing Corporation of India (CCIL), criticized the abrupt implementation of MiFID II in Europe. In her opinion, a single deadline is an overcharge for all LOU, since most companies only apply for an LEI shortly before the deadline. This results in an enormous effort in a very short time, which many LOU are not necessarily prepared for. Mitra wants to skilfully circumvent this collapse in India via a jurisdiction differing from the European one. This way, several deadlines should be implemented throughout the year leading to distribution of the applications over time.
However, given that the consequences of MiFID II are mandatory for all companies as of 3 January 2018, it is still to determine which companies could benefit from a more distant deadline.