Who needs an LEI number?

Why is there a need for the LEI?

There has been a global need for an identifier such as the LEI for decades. As global trade increased at an exponential rate in the 1900's, a need arose for transparency in transactions, a means of increasing trust in who you are dealing with, especially cross boarders.

There was no common identifier applicable to all legal entities across various industries, from companies, to funds and even Governments.

When capital markets and banking went digital, the need for a common identifier rose again. This caused a lot of hassle with regards to identity in regulating the corporate world and financial markets. Companies owned companies that were owned by other companies and it caused a lot of confusion around who owned who, and it made it very hard in some cases to find out who you exactly were dealing with. This was the cause for many famous fraud cases and made it easy to disguise 'dirty' money between organisations.

This also made it difficult for banks and other institutions to onboard new clients as KYC practices were relying on old and unconsolidated data.

Registry information can be hard to access and needed to be collected into a single database.

Lacking a reliable, trustworthy identifier it could become laborious and costly to onboard new clients and confirm identity (it is now estimated in research conducted by McKinsey that the LEI could save banks up to 2-4 billion Dollars annually in KYC processes).

Following the 2008 market crash, issue with transparency in the markets caused a litany of issues with regard to identifying counter parties in transactions. When the stock market crashed, thousands of funds and trusts were unidentifiable and the fall resulted caused mass confusion. The lack of transparency put financial institutions and banks in a vulnerable position.

This was addressed at the G20 Summit of June 2011, who created the concept of the LEI. The idea was to create a digital database, of all legal entities which was easily accessible, reliable and up to date.

According to LEI ROC the LEI was conceived to be used by the private sector to support improved risk management, increased operational efficiency, more accurate calculation of exposures, and other needs.

One centralised source of information, that contains vast amounts of attainable, high quality data.

GLEIF - The Global LEI System

Who needs an LEI?

Any entity that is considered a legal entity may complete a Legal Entity Identifier application. A Limited Company, an association, a trust, a charity anything that is recognised by law to be an organisation.
However, in order to enhance transparency in the global financial ecosystem some forms of legal entities are required by regulation to have an LEI.

LEI Codes are primarily required by any legal entity who is involved with financial transactions or operating within todays financial system, especially within the US, UK or EU. There are a number of mandates currently in existence which state "no LEI, no trade". This means if you do not have an LEI number when required, your trades will be blocked.

Often times the LEI identifier system is used in regulatory reporting so that regulators may have an easy way of identifying counterparties to transactions.

Examples of companies that require an LEI Code, are all financial intermediaries, funds and trusts, banking institutions and financial institutions, any legal entity that is listed on a stock exchange or that issues debt, securities or equity. LEI codes are also required for legal entities that fall into (but not limited to) the following classifications:

Financial intermediaries (CSDs)
Banks, investment companies and lenders
Trade OTC derivatives (except private individuals)
SMSF (Self Managed Superannuation Funds) traders and trustees

Pension schemes
Commodities trading
CFDs (Contract for Differences)
Securities transactions, SFTR reporting

The use of the Legal Entity Identifier is mandatory for some companies, but others that may still apply for an LEI when not required are charities, government bodies, associations, and branches. This is quite popular as there are plenty of benefits associated with getting an LEI Number.

The use of LEI code as an identifier is mandated by a number of EU directives such as EMIR , MiFIR, MIFID II, SFTR & CSDR. The United States also have similar requirements such as the Dodd Frank Act, the OFR, the Federal Reserve and the Securities & Exchange commission (SEC) mandate its use in many forms and filing duties.

LEI requirements vary depending on the country, legal jurisdiction or industry. It is the prerogative of the authorities acting in individual jurisdictions to mandate the use of LEIs.

However it is up to the individual market participants to obtain their own LEI and ensure it is up to date and renewed annually. That is where LEI Worldwide can help.

To find out if you need to have an LEI you can see this attachment which provides an overview of the official current and proposed regulatory activities which include the use of the LEI.