The question of all questions: What is an LEI?
A Legal Entity Identifier (abbreviation: LEI) is a globally identifiable, 20-digit identifier for financial market participants, which is structured in alphanumeric form, thus providing an international standard for companies in the financial market. These include banks, funds, securities traders, commodity traders, brokers and many other institutions that participate in the financial market. Since 2013, each financial company that carries out transactions in the derivatives market within the financial market must be marked with an LEI, thus enabling a problem-free traceability. This reduces risks in the financial market and significantly increases transparency.
A lot of Theory, now a little more practical: How is an LEI built up?
A Legal Entity Identifier consists of 20 alphanumeric digits. The first four digits indicate the LEI's issuer. These are followed by two digits acting as a separation. The following twelve characters identify the legal entity. At the end of the identification number is a two-digit checksum, which is formed according to the safety guideline ISO 7064.
The LEI is therefore an identification number, which offers very comprehensive information. The unique identification enables rapid traceability and transparent information retrieval via various transaction partners.
Together with the LEI, the company will be able to provide selected data and make it available publicly. These include the legal forms, the legal address of the head office, and the date of the first LEI award.
From May 2017 onwards, the Group's interdependencies are also to be shown. More information about this can be found in a separate blog post.
Is my company affected? Who needs an LEI?
The first distinction is to know whether an LEI is optional or mandatory. This is regulated and decided on by the national legislators. At the moment, however, the Legal Entity Identifiers are exclusively distributed to legal and independent participants in the financial market and not to natural persons. One of the prerequisites for the LEI is therefore the entry in the commercial register.
The Legal Entity Identifier is not only a control measure for the security of financial markets, but it can also have a positive external impact on a company. Above all, international investors and investors are increasingly looking for transparency and increased accessibility for companies. An LEI contributes significantly to this and makes it easier for analysts and investors to decide on new investments. For this reason, an LEI can also be extremely attractive for companies that are not obliged to own one.
You can find more detailed information about the legal bases and the relevant legal sources here.
Now plain and simple: What's the purpose of an LEI?
Put simply, the LEI database is a huge directory, accessible to any interested party, thus offering the greatest possible market transparency. The data are presented in an easy-to-understand manner and can be read by the average person on the financial market as well as by financial experts. The Legal Entity Identifier is a new milestone in the control mechanism of the financial market that also promotes market integrity. In addition, criminal activities such as financial fraud are made much more difficult and are easier to identify later on.
The LEI is already an integral part of various regulations and supervisory activities. A global comparison strengthens these auditing tasks and reduces risk management within key business processes. International investors are also demanding more and more transparency and security. The authorities of many countries now rely on the LEI as a tool to better evaluate risks, improve the accuracy of financial data and successfully minimize market abuse.
As already mentioned above, the LEI is a further step in a modern, digital world, which contributes to a fair market integrity through transparency. Founder and CEO of EQS Group, Achim Weick, has outlined the significance of interplay between digitalization and transparency in a recent blog post. Click here for more information.
How do I get an LEI?
You can obtain your individual identification number at authorized issuer, the so-called Local Operating Units (LOU). These are authorized by the Global Legal Entity Identifier Foundation (GLEIF) in a comprehensive accreditation process as a transfer agent and act as the first contact between the GLEIF and the LEI holders.
An application must be submitted informing them of the legal entity data. This data must then be adequately checked, thus preventing false information from being entered and published. It is also determined whether an LEI has already been awarded to the company, since a double entry is not permitted. If the test is successful, the appropriate LEI is then assigned, reported to the GLEIF and made accessible worldwide.