FOW Learning: LEI – Legal entity identification

If a legal entity is involved in a financial transaction or invests in financial instruments, like shares, bonds and derivatives, it will need a legal entity identifier code.  

This unique 20-character code is used to clearly identify the legal entity when it’s involved in a transaction, and there’s a publicly available global directory so that anyone can search for a legal entity, boosting trust and transparency.  

In this article, we’ll explore what legal entity identification is and what it’s used for, as well as when it’s needed in the derivatives market, who needs one and how to get one. 

What is legal entity identification? 

The legal entity identifier (LEI) is a 20-character alphanumeric code based on the ISO 17442 standard and developed by the International Organization for Standardization (ISO). The first four characters relate to the LEI issuer; the next 14 are specific to the entity itself, and the final two comprise the verification ID.  

It connects to information that allows for clear and unique identification – including information regarding ownership structure – of legal entities that take part in financial transactions and other related interactions.  

There’s a publicly available LEI data pool in the form of a global directory, and it aims to enhance transparency by providing standardised information that’s registered and regularly verified per protocols and procedures established by the Regulatory Oversight Committee.  

The Global LEI Index is free to access, so anyone in the world can search for a private or public organisation, giving legal entities the opportunity to boost trust and safeguard their financial decisions.  

When and why was legal entity identification created?

The idea of legal entity identification came about during the financial crisis in 2008, when regulators noted that there was no single identification code used globally. Instead, each country used different code systems when identifying legal entities and recognising transactions. It was difficult to identify transaction details of individual corporations, find the counterparties of transactions, calculate risk amounts, and analyse market-wide risks. As a result, the G20 developed the system in 2011. There are four key principles that underlie the LEI, as follows:  

1. It’s a global standard. 

2. Each legal entity is assigned to a single, unique identifier. 

3. It’s supported by high data quality. 

4. It’s available free of charge as it’s considered to be a public good.  

The first LEIs were issued in December 2012. The US and European countries require corporations to use the LEI when reporting details of transactions with over-the-counter derivatives, with the authorities of numerous jurisdictions mandating its use to identify entities involved in different financial transactions. Per the Financial Stability Board (FSB), the global adoption of LEI supports various financial stability objectives, combating financial fraud and market abuse while enhancing risk management assessment. It gives all parties a clear idea of who they’re trading with, improving the reporting of transactions and making for more effective oversight, and while its use isn’t yet completely uniform across all jurisdictions, it’s the closest thing to a universal system that exists. 

When does legal entity identification apply? 

 From January 2018, legal entity identification has applied whenever a regulated financial transaction involves a legal entity, so if you need to access financial markets (e.g., to manage investments or hedge risks), it is vital to have a legal entity identifier. Among the financial instruments covered by the LEI rules are shares, bonds, collective investment schemes, and derivatives.  

Under ISO 17442, the standard that underlies the LEI, the term legal entity includes but isn’t limited to unique parties that are legally or financially responsible for the performance of transactions. Or parties that have the legal right to enter independently into legal contracts in their jurisdiction.  

It’s also important to note that there is a difference between being eligible for an LEI and being required to have one. Any legal entity entering into a financial transaction is eligible for one, but any legal requirement to have one comes from national financial regulators.  

Focusing on derivatives specifically, LEI would apply to the following transactions: 

• Over-the-counter derivatives: Including swaps, forwards and options, this trading is done between two parties directly without the supervision of an exchange. LEIs are required here for the purpose of market transparency. 

• Exchange-traded derivatives: These financial contracts, like futures and options, are traded on a regulated exchange. LEIs are required here for reporting and clearing. 

• Cross-border transactions: When it comes to trade concerning legal entities in different jurisdictions, LEI is important because it standardises identification globally.  

• Collateralised transactions: With these agreements, where assets like cash or securities are provided as collateral to lessen counterparty credit risk, LEI is required.  

How does legal entity identification work? 

The Global Legal Entity Identifier System is the product of worldwide regulatory authorities that work with the private sector to identify legal entities engaged in financial transactions through the distribution of unique LEIs. It comprises the following three tiers: 

Regulatory Oversight Committee: This is a group of public authorities from around the world that coordinate and oversee legal entity identification. 

Global LEI Foundation (GLEIF): This not-for-profit organisation was founded by the Financial Stability Board in June 2014 to support the implementation and use of the legal entity identification system. It was designed to ensure the LEI’s processes align with its goals.  

LEI issuing organisations: These are also sometimes referred to as Local Operating Units, and they offer services including registration and renewal. They’re the port of calling for legal entities who want to obtain a LEI.  

The minimum reference data that’s supplied for each LEI is as follows, though more information could be registered if agreed between the legal entity and the LEI issuing organisation:   

• The official name of the legal entity is recorded in the official registers. 

• The registered address of the legal entity. 

• The country of formation. 

• The codes for the representation of names of countries and subdivisions. 

• The date of the first LEI assignment, the date of the last update of information, and the expiry date.  

The benefits and challenges of legal entity identification 

The legal entity identifier code system has both benefits and challenges. While the system increases trust and transparency and can make trade easier, it does take a degree of time and money. That said, it’s generally considered that the benefits outweigh the challenges. The main benefits include:  

• Increased transparency and trust between legal entities around the world. 

• Centralised national business registry data to support data consumption and the supply of related services. 

• Streamlined operations including knowing your customer processes and counterparty due diligence, to make international trade easier. 

• More efficient lifecycle management and client onboarding. 

• Compliance with regulatory requirements (both present and future) is supported. 

• Relationships between legal entities are transparent, making anti-money laundering and combating the funding of terrorism measures simpler. 

 There are some challenges relating to legal entity identification too, including the following:  

• There’s a fee to obtain the LEI and an annual renewal fee, though entities can sometimes save money by paying for the LEI and annual renewals at the same time. 

• Administrative stress – It’s mandatory to obtain and renew an LEI, so organisations need to stay on top of it – when not renewed in time, it can become lapsed, and this can affect trade. 

• Adoption isn’t uniform, and not all jurisdictions use LEIs, so it’s not a truly global standard yet.  

How to obtain legal entity identification

To obtain a legal entity identifier, you need to apply through one of the LEI-issuing organisations on the GLEIF website. There’s an online application form that will involve supplying reference data and paying the required fee. There’s no set fee, and it can vary between organisations and by jurisdiction. The organisation will verify the information provided and issue the LEI, and this could take anywhere from a few minutes to a couple of days.   When it comes to paying for the LEI, the GLEIF outlines three options, as follows:  

1. If the entity registers itself, this is known as basic self-registration, and it pays the registration fee. 

2. If the entity gets explicit permission to register a separate, unrelated entity, this is known as assisted registration and the fee is paid by the party performing the registration.  

3. If the entity uses a validation agent – a financial institution or similar organisation involved in identity verification and validation that can obtain and maintain LEIs for their clients – the validation agent pays for the LEI on their client’s behalf. It’s up to the validation agency to determine how they’re reimbursed, if at all. Validation agents use the same checks they do within usual client identification processes, like knowing your customer checks.  

Legal entity identification has become particularly important in building transparency and trust across the globe – allowing anyone to identify participants in financial transactions – and the process of obtaining a code is relatively simple.  

Our FOW Reference Data product provides trusted reference data and a symbology service, with which LEIs can be mapped. 

Frequently asked questions 

How long does it take to get a legal entity identifier? 

You can obtain a legal entity identifier via a LEI issuer, also known as a Local Operating Unit. They offer registration and renewal services, and the processing time can take from a few minutes to a few hours, depending on factors like the type of legal entity and the jurisdiction.  

Who is required to have a legal entity identifier? 

Legal entities that regularly take part in financial transactions need to have an LEI. In particular, entities that trade financial instruments like derivatives and stocks, and institutions like banks and investment firms, must have one.  

How often do you need to renew a legal entity identifier? 

A legal entity identifier must be renewed annually to avoid penalties or having trading activities suspended. While it usually doesn’t take long to obtain a legal entity identifier, it’s recommended to begin the process weeks in advance of the expiration date to allow for any potential delays.  

How much does a legal entity identifier cost? 

The cost of a legal entity identifier can vary depending on the company and jurisdiction. For example, in the UK, the cost will be around £49 to £65 plus VAT with annual renewal being around £40 to £50. In Europe, it could be around €50 to €100 per year, and in the US around $60 to $100 with annual renewal priced at around $40 to $65.  

It sometimes works out cheaper to buy a legal entity identifier and multiple renewals at once, or just multiple renewals if you only bought the legal entity identifier for one year originally.  

Can individuals get a legal entity identifier?  

Strictly speaking, no. However, in 2015, the conditions under which people acting in a business capacity can obtain LEIs were published in a statement by the Regulatory Oversight Committee. Individuals cannot be assigned an LEI themselves, but they can obtain a verifiable LEI (vLEI) role credential. This verifies their identity and role within a legal entity that holds a vLEI itself. 

References: 

https://www.fsb.org/uploads/pr_140630.pdf