What is LEI?
Legal Entity Identifier (LEI) is a reference code – such as a one-time code – used in markets and jurisdictions to identify legally separate entities involved in financial transactions. LEI is designed as a lunch pin for financial data – the first global and unique entity identifier that enables risk managers and regulators to quickly and accurately identify the parties to a financial transaction. For example, a large international bank may have a LEI with parent identification and a LEI for each legal entity that buys stocks, bonds, swaps, or other financial market transactions.
Why do we need LEI?
When the Lehman Brothers disbanded in September 2008, regulators and private sector firms were unable to quickly and thoroughly assess the market participants’ risks to Lehman and how they were connected to the vast network of market participants. The financial crisis underscored the need for a global system for identifying financial relations, so that regulators and private sector firms can better understand the true nature of risk exposure in the financial system.
If a global LEI is so useful, why not set it up soon?
The private industry has made several attempts over the last 20 years to establish a global entity identification system but failed to achieve the coordination required to launch a global solution. Following the financial crisis of 2007-09, the leaders of the world’s largest economies, working through the G20 and the Financial Stability Board (FSB), agreed to develop an integrated solution to help overcome these barriers. The effort resulted in a public interest initiative that is now the global LEI system.
How does LEI work?
Each LEI is a set of 20-digit alphabet number codes and related data items that uniquely identifies a legally separate entity involved in financial market activities. This global standard meets the specifications of the International Organization for Standardization (ISO) 2020, as documented in ISO 17442-1: 2020, Legal Entity Identifier (LEI).
What are the next steps?
Some large multinational banks have thousands of legal entities, many of which operate around the world under similar names. As the global LEI system expands, it is expected to help regulators and market participants understand and document these complex corporate structures and rankings.
LEI Code – Legal Entity Identification Code.
* A unique identification code for entities trading in financial markets (stocks, bonds, futures, foreign exchanges, etc.).
* Every transaction made in the markets will be linked to LEI with another counterpart.
* Used by regulators to monitor financial markets.
* LEI connects financial markets, companies and regulators.
* LEI codes are issued under GLEIF approved LoUs.
* GLEIF – Global Legal Entity Identifier Foundation
* No LEI, no trade.
Conclusion
In short, whether you are managing a self-managed fund, or managing it through a fund manager, the fund and its counterpart will need LEI. Initially there was some gray area around the fund structure and LEI was required for different types of funds, but it is hoped that LEI will be required for all funds in the future.