Why is LEI necessary?
The major question that comes is what is LEI number? So basically The Legal Entity Identifier is a 20- character, alpha-numeric code based on the ISO 17442 standard developed by the ISO (International Organization of standardization). It somehow connects to key reference information that enables unique and clear identification of legal entities participating in financial transactions. Each LEI contains well-structured reference data which is categorized into two levels:
Level 1- Who is Who?
It includes entity registration details such as the number of registrations, legal names, HQ and legal addresses, etc.
Level 2- Who owns whom?
It contains information about an entity’s ownership structure and thus owns the answer to this question who owns whom.
Putting it in a more simple way, the publicly available LEI data pool transfers unstructured entity registration data into the standardized global directory, which perfectly enhances transparency in the global marketplace.
It is established in June 2014 by the financial stability board, the Globally Legal Entity Identifier Foundation is tasked to use and support the implementation of the LEI. The foundation is overseen and backed by the LEI Regulatory oversight committee, representing public authorities from around the globe that have come together to jointly drive forward transparency within the global financial market.
GLIEF services ensure the operational integrity of the Global system. GLIEF increases both the information available within and the quality of the data pool and makes the public access to the information even easier.
ISO 17742 Standard:
The international organization of standardized (ISO) 17742 defines a set of attributes or legal entity reference data that are the most necessary part of the identification. The LEI code itself is neutral, with no past intelligence or country codes that could create complexity for users which is not necessary.
The ISO 17742 standard specifies the minimum reference data, which must be supplied for each LEI.
This data is usually considered as Level 1.
Level 2- Who owns Whom?
It answers the question of who owns whom? Its aim is to identify the Mother-daughter relationships in the corporate world. Only entities whose parents or ultimate parent combines the financial accounts of the daughter entity have the ability to report Level 2 data.
What is the main purpose of LEI?
This system was established as a response to the financial crisis and is mainly aimed at improving transparency in the financial data systems nowadays. There are several methods of identifying entities across various countries and markets. However, the GLEI system, when fully operational will ensure that there is just one standard system. There are many regulations among jurisdictions that need the use of LEI. However, the main idea of Global Legal Entity Identifier is to simplify, standardize, and provide the comfort of identification of any legal entity worldwide.
The use of LEI in Financial Regulations:
The LEI is in use worldwide among different jurisdictions. The European Union and USA were the first to adopt LEI in financial reporting. Although LEI adoption also remains sometimes uneven, across different jurisdictions, with coverage concentrated in Canada, The United States, and the EU now many countries are starting to follow the adoption. RBI (Reserve Bank of India) has made it mandated to use LEI in the counter derivatives market as well as mandating the use of LEI for large corporate borrowers and FX deals.
As we see, the number is highly mandatory for all those who wish to start something new. Businesses about incept should definitely take care of getting Legal Entity Identifiers to smoothen the upcoming processes and formalities. As an expert from the industry, I believe that there is no alternative to it if you wish to succeed.