A new movement is driving the adoption of legal entity identifiers (LEIs) by businesses involved in cross-border trade. GTR speaks to Stephan Wolf of Global Legal Entity Identifier Foundation (GLEIF) to find out more.
GTR: Why have LEIs become so significant to financial services? How did the concept develop?
Wolf: In the wake of the financial crisis the drivers of the LEI initiative (the G20, the Financial Stability Board (FSB) and many regulators around the world), focused on using the LEI to create transparency in the derivative markets. These efforts have generated excellent results.
At the end of June 2017, some 520,000 LEIs were assigned to legal entities. Most of these entities are based in the US and the EU where regulations require the use of LEIs to uniquely identify counterparties to transactions in regulatory reporting. These regulations include Dodd-Frank, the European Market Infrastructure Regulation and the forthcoming revised EU Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR).
With regard to transaction reporting under MiFIR, the European Securities and Markets Authority (ESMA) has clarified that investment firms should obtain LEIs from their clients before providing services which would trigger reporting obligations in respect of transactions carried out on behalf of those clients.
The LEI is a 20-digit code based on the ISO 17442 standard. It connects to key reference information that enables clear and unique identification of legal entities participating in global financial transactions. An LEI is an identifier for not only companies but also individuals acting in a business capacity, or international branches of larger firms, funds, etc. These entities are all eligible for an LEI.
It is the responsibility of authorised LEI issuing organisations to supply registration, renewal and other services, and act as the primary interface for legal entities wishing to obtain an LEI.
GTR: What is GLEIF and what is its primary role in terms of the use of LEIs?
Wolf: Established by the FSB in June 2014, GLEIF is a not-for-profit organisation created to support the implementation and use of the LEI. GLEIF manages a network of partners, the LEI issuing organisations, to provide trusted services and open, reliable data for unique legal entity identification worldwide.
Management means three things: we define technical, organisational and legal standards; we then check for compliance with the standards on an annual basis; and we also have some operational responsibilities.
For example, GLEIF makes available the technical infrastructure to provide, via an open data license, access to the full global LEI repository, free of charge to users.
GTR: What value can LEIs bring to supply chain finance/management?
Wolf: We are convinced that the global LEI system has the potential to also benefit the wider business community across many sectors including supply chain finance. Organisations not only need to keep on the right side of the regulators, but also need to be able to make smarter, less costly and more reliable decisions about who to do business with.
Businesses across the globe are currently grappling with how to develop and implement a common entity identification system that could serve as a linchpin to identify financial market participants and connect data. Entity identification can be a time-consuming, costly and complex task; most organisations do not maintain a single database which collates up-to-date reference data to existing or prospective clients, business partners and counterparties. Gathering and maintaining related data requires replicating efforts across the market, tying up resources that could be spent more productively elsewhere.
Yet, simply gathering large volumes of data will not suffice. What is also needed is a way to track the connections between companies across different jurisdictions. To date, related information is very difficult to trace, particularly regarding cross-border corporate structures. After all, there are thousands upon thousands of companies listed on global stock exchanges and millions of others listed on national registries. The latter group presents more of a problem since registries are extremely disjointed.
Similar issues exist in supply chain finance: you don’t just want to know the name of your suppliers, you also want to know the ownership structure behind that supplier.
So, what’s the solution? The good news is, there is one and progress towards unlocking it is already well underway. It exists in the form of the Global LEI Index. As a result of GLEIF services, this is a free online source that provides open, standardised and high-quality legal entity reference data with the potential to capture any entity engaging in financial transactions globally. The Global LEI Index brings efficiency, transparency and trust to legal entity identification.
GTR: Why do we need to track entities within the supply chain? Is it only for compliance/legal reasons? Or does it also relate to sustainable and ethical sourcing?
Wolf: Taking advantage of the Global LEI Index will empower organisations across the board to cut costs, simplify and accelerate operations and gain deeper insight into the global market place. If your counterparts – corporate customers, suppliers and other business partners – could all be uniquely, easily and speedily identified with the LEI, that would provide you with cost benefits and new business opportunities.
It also supports sustainable and ethical sourcing, as you mention. Finally, and with regard to supply chain finance, we believe that the LEI could greatly contribute to optimise know-your-customer (KYC) processes, which in turn should make it easier to access finance.
GTR: Which organisations is GLEIF talking to in order to make the use of LEIs in supply chains a reality?
Wolf: We are talking to organisations like ISO for the standards and GS1 for the barcode.
GTR: Who will enforce the adoption of LEIs in the supply chain space?
Wolf: It is the prerogative of the authorities acting in individual jurisdictions to mandate the use of LEIs. GLEIF closely monitors initiatives relevant to legal entity identification in regulatory reporting and supervision and we make related information available on our website. This said, we are not aware of any compliance requirements to use the LEI in the supply chain space. However, as mentioned above, we invite companies around the globe to think beyond compliance when considering reasons to obtain an LEI.
The benefits generated for the wider business community by the Global LEI Index grow in line with the rate of LEI adoption. So, our message to businesses around the globe is this: get an LEI and make it work for you.
GTR: What does GLEIF hope to achieve within the trade and supply chain finance space?
Wolf: The ultimate goal is that you can identify businesses with one unique identifier, and the LEI can help with that. We are on a journey to increase the rate of LEI adoption across all business segments and industries so that in the future, the Global LEI Index will capture an increasing number of entities engaging in financial transactions globally, providing a 360-degree view.
GTR: Who would benefit the most? Financiers? Companies?
Wolf: Accessing and using the LEI data could support a multitude of applications. Among other benefits, the Global LEI Index enables:
- Clear and unique identification of legal entities participating in financial transactions, for example, counterparty identification including who owns whom.
- Identification of client exposure through linking internal information with LEI data.
- Analysis of underlying and external exposures.
- Onboarding of new clients through fast access to business card information.
- Resolution of conflicts that may arise from outdated client data in global asset servicing, accounting, compliance, risk and financial reporting.
GTR: What will be the implications for companies – in terms of costs, and otherwise?
Wolf: Cost-wise, currently, each legal entity pays a small fee for the issuance and annual renewal of an LEI, and the quality checking thereof.
The Global LEI System is designed to encourage competition between LEI issuers to the benefit of legal entities seeking to obtain an LEI. The fees charged for the issuance and maintenance of an LEI are entirely a matter for the LEI issuing organisations and must be cost-based. GLEIF is a not-for-profit foundation which makes all its services to users available free of charge. It currently receives US$19 per issued or renewed LEI from the LEI issuers. Future growth will allow this fee to be further reduced.
The LEI system works on the Open Data Charter, which means that the data that we collect around the world is available to everyone free of charge.