Legal Entity Identifiers (LEIs): An introduction

A legal entity identifier (LEI) is a 20-character alphanumerical code that is unique to the entity it is allocated to. 

It is associated with a set of reference data items for the entity that engages in financial markets activities. This includes derivatives (including hedging) trading, buying shares and bonds and custody arrangements. 

Any legal person or structure organised under the laws of any jurisdiction is a ‘legal entity’ eligible for a LEI.  An LEI stays with the entity for its entire existence, and they are registered by the Global Legal Entity Identifier Foundation (GLEIF). An entity must maintain its LEI by paying an annual fee.

For example, Irwin Mitchell LLP’s LEI is 2138008ANE5QKSVFL345.

Why are they important?

“No LEI, No Trade.”

An LEI provides a unique identifier for all entities participating in financial transactions and on a cross border basis. They identify exposure for risk management, transparency and market surveillance. 

The G20 endorsed the establishment of the Global Legal Entity Identifier System to improve measurement and monitoring of systematic risk. They are beneficial for businesses due to simplified regulatory reporting, database management free of charges, and increased operational efficiency.

From 3 January 2018, the Markets in Financial Instruments Directive II (MiFID II) has provided that any legal entity engaging in a relevant financial transaction, needs a LEI in order to make such a transaction under the “No LEI, No Trade” initiative. 

Why were they introduced?

Private industry attempted several times to establish a global entity identification system. However, the coordination required to launch this solution was not achieved until the financial crisis in 2007-2009. 

During the Lehman Brothers collapse in September 2008, private-sector firms and regulators were unable to swiftly assess the extent of the market’s exposure to Lehman and how widespread the private sector was impacted. The financial crisis highlighted the need for a global system to identify financial connections, ensuring that risk exposures are capable of being assessed across the financial system.

The establishment of the LEI system globally was primarily a response to the financial crisis in 2007-2009 but was also welcomed as a public interest initiative. In 2011, the G20 called on the Financial Stability Board (FSB) to give recommendations on a global LEI and supporting governing structure. Endorsing the establishment of the Global Legal Entity Identifier System, the G20 has the objective to “encourage global adoption of the LEI to support authorities and market participants in identifying and managing financial risks”.

The aim of standardisation has been further promoted, having been made an EU law requirement from 3 January 2018, in MiFID II. After Brexit, MiFID II was onshored into UK law.

The Global Legal Entity Identifier System

The Global Legal Entity Identifier System is composed of the Regulatory Oversight Committee (ROC), the GLEIF, and LEI issuers, known as Local Operating Units (LOUs). The entire system is overseen and co-ordinated by the ROC, which is a group of more than 65 financial markets regulators and other public authorities from more than 50 countries. 

There are approved LEI-issuing authorities for each jurisdiction, a list of which are available at the GLEIF website. These LOUs are sponsored by local regulators, to assign and maintain LEIs that feed into the Central Operating Unit (COU), which is governed by the GLEIF. The costs of an LEI vary depending on the LEI issuer; however, each LEI issuer is obliged to operate on a cost recovery basis; the fee charged by the LEI issuer is also limited by competition with all other LEI issuers.

The GLEIF considers the LEI to be the “linchpin that connects the dots across the universe of entity identification”. In their vision statement, they call on all private and public sector organisations around the globe to consider obtaining a LEI to remove the efforts associated with the maintenance of entity reference data and empower market participants to cut costs, simplify and accelerate operations and gain deeper insight into the global marketplace. This highlights the challenge faced by the GLEIF in achieving global harmonisation. 

LEI advantages 

Primarily, LEIs help to reduce the risk related to cross-jurisdictional financial transactions. They provide transparency and manage risk in supply chains by giving visibility to the ownership structure of organisations. Their use in the financial industry means that data which requires reporting internally for risk management procedures and to external regulators, will be more consistent. Therefore, the stability of markets and threats to the financial system are easier to identify and analyse.

Many regulators require entities to have a LEI. This ensures regulatory compliance with Anti Money Laundering legislation (AML), Customer Due Diligence (CDD) and Know Your Customer (KYC) requirements. In addition, this can improve a client’s experience, as counterparty onboarding processes are streamlined, and efficiency is promoted through decreasing the administrative burden typically associated with client verification. For businesses, this in turn reduces costs associated with manual data entry and verification and facilitates uninterrupted trade. 

How to obtain an LEI? Practical summary – a one-minute guide:

There are approved LEI-issuing authorities for each jurisdiction, a list of which are available at the GLEIF website. These Local Operating Units (LOUs) are sponsored by local regulators, to assign and maintain LEIs that feed into the Central Operating Unit (COU), which is governed by the GLEIF. The costs of an LEI vary depending on the LEI issuer; however, each LEI issuer is obliged to operate on a cost recovery basis; the fee charged by the LEI issuer is also limited by competition with all other LEI issuers.

The London Stock Exchange (LSE) is the issuing authority in the UK. Applications should be submitted through the LSE’s UnaVista platform, which requires registration before applying for an LEI. Once logged into the UnaVista system, a LEI request can be raised. This request can be submitted by the entity itself or by an authorised registrant upon receipt of a signed Registrant Authorisation. 

The LSE requires the following information to submit an LEI request:

• The Official name of the Legal Entity
• The Formation Country
• The Legal form of the Entity
• The current address of the Headquarters of the Legal Entity
• The current address of Legal formation of the Legal Entity
• The Official Business Registry where the foundation of the Legal Entity is mandated to be recorded on formation of the entity, where applicable
• The reference in the Official Business Registry to the registered entity, where applicable e.g. company registration number
• Supporting documentation can also be submitted, such as Articles of Incorporation, Trust Agreement, Fund offering documentation, Prospectus

The LSE aims to process requests within 1-3 working days of submission but this will depend on the number of requests and the ability to validate the data attributes. An email containing the LEI will be sent from lei@lseg.com. The current initial allocation cost is £65 plus VAT. 

LEIs are only valid for a year, after which they show as ‘lapsed’ on the GLEIF registry if not renewed. The LSE will send a reminder email for renewal, which currently has a fee of £50 plus VAT. A review of the entity’s information on renewal is revalidated manually, so time must be allowed for the renewal to be processed. 

Practical considerations

LEIs can now be obtained relatively quickly in most G20 jurisdictions. Like the UK when LEIs became compulsory, in jurisdictions that have recently introduced mandatory LEIs, entities should be careful that they obtain their LEIs before the date that they would like to trade. 

It should be noted that some of the questions from a LEI issuer might take some time to answer for operational or practical reasons. An entity should treat obtaining and maintaining an LEI as an important part of its onboarding and regulatory compliance obligations. It is commercially important after all: “No LEI, No Trade”!

How we can help

For more information about this contact Jeremy Ladyman and Jasmine Greenwood from our Banking & Finance team.