Legal Entity Identifier (LEI) use under the EU financial regulation
European Union Electricity Market Glossary

 


 

 

The Legal Entity Identifier (LEI) is a 20-character, alpha-numeric code, to uniquely identify legally distinct entities that engage in financial transactions. 

 

Lei

Once a legal entity obtains an LEI code, the code stays with the legal entity for its existence.

 

LEIs are issued by "Local Operating Units" (LOUs) of the Global LEI System (see how to obtain an LEI).

  

The entity entrusted with the task to coordinate and oversee a worldwide framework for the Global LEI System is the Regulatory Oversight Committee (ROC) being a group of over 60 public authorities from more than 40 countries. 

 

The ROC was established in January 2013 as a stand-alone committee after recommendations by the international Financial Stability Board (FSB) and endorsement of the ROC Charter by the Group of Twenty (G-20) nations in November 2012.

 

LEI system, recommended by the FSB and subsequently endorsed by the G20 group, has become a commonly acceptable method to identify parties to financial transactions that are legal entities.

 

The system is intended, in particular, to allow for financial transactions' monitoring on a global, cross-border basis.

 

The institution of LEI Registration Agent has also been introduced. 

 

This facility enables trading venues and systematic internalisers (SIs) to assist the issuer applying for the LEI to access the network of LEI issuing organisations.

 

The first LEIs were issued in 2012 and by the end of January 2017 487,000 had been registered (see Global LEI initiative struggles for momentum).

 

As of end-May 2017 the LEI's coverage amounted to over 513,177 entities from 200 countries; the figure for the 24 FSB member jurisdictions was 376,064 (OTC Derivatives Market Reforms Twelfth Progress Report on Implementation, Financial Stability Board, 29 June 2017, p. 14).

 

There are numerous regulators around the world that already require or will require entities to obtain an LEI (ISDA, GFMA, AFME, ASIFMA and SIFMA mention in that context for example the Commodity Futures Trading Commission, Securities and Exchange Commission, Reserve Bank of India, and certain Canadian provincial authorities).

 

The said FSB Twelfth Progress Report obseves that the LEI is embedded in the rules of some 40 jurisdictions, of which 14 are FSB jurisdictions.

 

Some global standard-setting initiatives, like CPMI-IOSCO, have also called for use of the LEI.

 

The use of LEI is already required or recommended under a number of the European Union regulations, in particular:

 

European Markets Infrastructure Regulation (EMIR) - as from 1 November 2017 the EU trade repositories are mandated to reject trade reports that do not contain an LEI (irrespective of whether they pertain to the EU or non-EU market participants),

 

MiFID II/MiFIR - the key date is 3 January 2018, i.e. the date when MiFID II/MiFIR enter into force, as from this date market participants will not be able to trade with in-scope investment frms if they do not have an LEI (MiFID II/MiFIR require investment firms to obtain an LEI from their clients prior to providing a service that would result in a transaction reporting obligation),

 

Market Abuse Regulation (MAR), 

 

- Capital Requirements Regulation (CRR), and

 

- Central Securities Depositories Regulation (CSDR),

 

- Transparency Directive (Commission Delegated Regulation (EU) 2016/1437 of 19 May 2016 supplementing Directive 2004/109/EC of the European Parliament and of the Council with regard to regulatory technical standards on access to regulatory information at Union level).

 

The brief overview of the respective legal frameworks can be found below.

 

 

LEI under MiFID II/MiFIR

 

 

The fundamental rule that entities eligible for LEIs should be identified under MiFID II with a LEI follows from Article 26(6) MiFIR, Article 5 of Commission Delegated Regulation (EU) 2017/590 of 28 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the reporting of transactions to competent authorities, and Annex I thereto.

 

 

Commission Delegated Regulation (EU) 2017/590 of 28 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the reporting of transactions to competent authorities, Recitals 6 - 8, Article 5, Article 13

 

Recital 6

In order to ensure certain and efficient identification of investment firms responsible for execution of transactions, those firms should ensure that they are identified in the transaction report submitted pursuant to their transaction reporting obligation using validated, issued and duly renewed legal entity identifiers (LEIs). 


 

Recital 7

In order to ensure consistent and robust identification of natural persons referred to in transaction reports, they should be identified by a concatenation of the country of their nationality followed by identifiers assigned by the country of nationality of those persons. Where those identifiers are not available, natural persons should be identified by identifiers created from a concatenation of their date of birth and name. 


 

Recital 8

In order to facilitate market surveillance, client identification should be consistent, unique and robust. Transaction reports should therefore include the full name and date of birth of clients that are natural persons and should identify clients that are legal entities by their LEIs. 


 

Article 5
Identification of the investment firm executing a transaction


1. An investment firm which executes a transaction shall ensure that it is identified with a validated, issued and duly renewed ISO 17442 legal entity identifier code in the transaction report submitted pursuant to Article 26(1) of Regulation (EU) No 600/2014.


2. An investment firm which executes a transaction shall ensure that the reference data related to its legal entity identifier is renewed in accordance with the terms of any of the accredited Local Operating Units of the Global Legal Entity Identifier System.

Article 13 
Conditions upon which legal entity identifiers are to be developed, attributed and maintained


1. Member States shall ensure that legal entity identifiers are developed, attributed and maintained in accordance with the following principles: 
(a)  uniqueness; 

(b)  accuracy; 

(c)  consistency; 

(d)  neutrality; 

(e)  reliability; 

(f)  open source; 

(g)  flexibility; 

(h)  scalability; 

(i)  accessibility. 



Member States shall also ensure that legal entity identifiers are developed, attributed and maintained using uniform global operational standards, are subject to the governance framework of the Legal Entity Identifier Regulatory Oversight Committee and are available at a reasonable cost.

2. Investment firm shall not provide a service triggering the obligation for an investment firm to submit a transaction report for a transaction entered into on behalf of a client who is eligible for the legal entity identifier code, prior to obtaining the legal entity identifier code from that client. 



3. The investment firm shall ensure that the length and construction of the code are compliant with the ISO 17442 standard and that the code is included in the Global LEI database maintained by the Central Operating Unit appointed by the The Legal Entity Identifier Regulatory Oversight Committee and pertains to the client concerned. 


It is also unequivocally underlined by ESMA's Guidelines Transaction reporting, order record keeping and clock synchronisation under MiFID II, 10 October 2016, ESMA/2016/1452 (p. 24).

 

MiFIR does not foresee any exemptions from the investment firms' obligation to identify clients who are eligible for a LEI. 

 

As a result, firms are required to apply for an LEI before they start transacting with EU's counterparties.

 

The LEI has also become part of the Know Your Customer (KYC) and on-boarding process.

 

Eligibility to obtain an LEI

 

Who is eligible to obtain LEI, then? The category is very broad and includes each legal entity, in particular, partnerships, societies, associations, wealth clients, funds, sub-funds (sub-funds cannot share an LEI - each sub-fund must get its own LEI), subsidiaries (subsidiary cannot rely on a parent LEI), etc.

 

It is underlined by ISDA, GFMA, AFME, ASIFMA and SIFMA that clients of investment firms require an LEI even if:


- they are not an EU entity,


- they are not operating or domiciled in the EEA,


- they are not directly subject to EU regulations, 


- they are the non-reporting counterparty;

 

- they had no previous obligation to get one.

 

LEI's issuance for individuals acting in a business capacity

 

The LEI ROC statement 30 September 2015 on individuals acting in a business capacity clarified that individuals at issue are eligible to obtain LEIs, subject, in particular, to the following conditions:

 

- they conduct an independent business activity as evidenced by registration in a business registry;

 

- only one LEI is issued for the same individual and adequate verifications are made for data protection,

 

- privacy or other obstacles do not prevent the publication of the current LEI data file.

 

Individuals acting in a business capacity are considered as investment firms under certain conditions defined in Article 4(1)(1) of MiFID.

 

Branches in the LEI framework 

 

A branch should be identified with the LEI of its head office, even if it may be considered eligible for a LEI in some cases.

 

According to the LEI ROC statement of 11 July 2016, certain branches might be considered as eligible for an LEI subject to the conditions set out in the statement (the LEI ROC statement of 11 July 2016 11 Including data on international/foreign branches in the Global LEI System).

 

Obligations put on investment firms with respect to LEIs

 

Given strict conditions of MiFID II for undertakings that are not legal persons to be licensed as investment firms and the additional clarifications provided by the LEI ROC, the European Securities and Markets Authority (ESMA) considers there is no need to allow alternative identifiers to be used for the purpose of the identification of MiFID investment firms.

 

Under Article 26 of MiFIR ESMA was required to draft regulatory technical standards to specify the conditions under which investment firms should use the legal entity identifiers for the purpose of client identification in the transaction reports.

 

In this process the rule has been adopted that an investment firms should have appropriate arrangements in place in order to collect and verify the LEI provided by the client prior to the provision of the relevant investment service resulting in the investment firms obligation to submit a transaction report under Article 26 of MiFIR and to ensure that the client can execute transactions only upon disclosure and authentication of the LEI.

 

With respect to the MiFID II secondary legislation ESMA established, moreover, the following:

 

- the proposed requirement to validate against the global LEI database is not intended to apply on a transaction by transaction basis,

 

- the requirement to validate against the global LEI database does not include an obligation for investment firms to ensure that the LEI status of their clients is not lapsed due to lack of payment of the maintenance fee.

 

Verification should comprise validation of the format and the content of the identifier provided by the client.

 

The format validation refers to the length and construction of the code.

 

Content validation against global LEI database maintained by the Central Operating Unit will ensure that the identifier is an authentic LEI code and it pertains to the actual client.

 

Tables stipulating the details to be reported in transaction reports with respect to LEIs have been drafted by ESMA in the Regulatory technical and implementing standards – Annex I MiFID II / MiFIR of 28 September 2015 (ESMA/2015/1464)) and finally determined in the Annex to Commission Delegated Regulation (EU) 2017/590 of 28 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the reporting of transactions to competent authorities mirror the above propositions.

 

According to the established format LEI should be reported to designate equally, the "executing entity" (field 4 of the Table 2), as well as the "submitting entity" (field 6 of the Table 2).

 

In the latter case, the LEI should be used to identify the entity submitting the transaction report to the competent authority in accordance with Article 26(7) of the MiFIR:

 

- where the report is submitted by the executing firm directly to the competent authority, it should be populated with the LEI of the executing firm (where the executing firm is a legal entity), 

 

- where the report is submitted by a trading venue, it should be populated with the LEI of the operator of the trading venue,

 

- where the report is submitted by an Approved Reporting Machanism (ARM), it should be populated with the LEI of the ARM.

 

Under MiFID II framework the LEI is also required for the designation of the buyer and the seller in the transaction report.

 

When it comes to the buyer (Field No 7 of the transaction reporting format) where the acquirer is a legal entity, the LEI code of the acquirer is required to be used.

 

Where the transaction was executed on a trading venue or on an organised trading platform outside of the European Union that utilises a central counterparty (CCP) and where the identity of the acquirer is not disclosed, the LEI code of the CCP need to be used.

 

In turn, where the acquirer is an investment firm acting as a systematic internaliser (SI), the LEI code of the SI is envisioned be used.

 

Analogous rules apply for the designation of the seller (Field No 16 of the transaction reporting format), with the respective substitution of the disposer in place of acquirer.

 

LEI's renewal

 

As regards the LEI renewal:

 

- executing investment firms must ensure that their LEI is renewed according to the terms of any of the accredited Local Operating Units of the Global Entity Identifier systems (Article 5(2) of said Commission Delegated Regulation (EU) 2017/590 of 28 July 2016),

 

- there is no requirement under Article 13(3) of the said Regulation (EU) 2017/590 to ensure that a LEI for a client or a counterparty has been renewed.

 

This interpretation is confirmed by ESMA in:

 

- ESMA's Consultation Paper Guidelines on transaction reporting, reference data, order record keeping & clock synchronisation, 23 December 2015, ESMA/2015/1909, p. 20,

 

- ESMA's Guidelines Transaction reporting, order record keeping and clock synchronisation under MiFID II of 10 October 2016, ESMA/2016/1452, p. 24.

 

LEI in the provisions regulating the obligation to supply financial instruments reference data under MiFID

 

For the purposes of an obligation to supply financial instruments reference data an LEI is indispensable too.

 

 

Article 3 of the Commission Delegated Regulation (EU) 2017/585 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the data standards and formats for financial instrument reference data and technical measures in relation to arrangements to be made by the European Securities and Markets Authority and competent authorities

 

Identification of financial instruments and legal entities

 

1. Prior to the commencement of trading in a financial instrument in a trading venue or systematic internaliser, the trading venue or systematic internaliser concerned shall obtain the ISO 6166 International Securities Identifying Number ('ISIN') code for the financial instrument.

 

2. Trading venues and systematic internalisers shall ensure that legal entity identifier codes included in the reference data provided comply with the ISO 17442:2012 standard, pertain to the issuer concerned, and are listed in the Global Legal Entity Identifier database maintained by the Central Operating Unit appointed by the The Legal Entity Identifier Regulatory Oversight Committee.

 

Article 3(2) of the Commission Delegated Regulation (EU) 2017/585 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the data standards and formats for financial instrument reference data and technical measures in relation to arrangements to be made by the European Securities and Markets Authority and competent authorities envisions that trading venues and systematic internalisers must ensure that legal entity identifier codes included in the reference data provided comply with the ISO 17442:2012 standard, pertain to the issuer concerned, and are listed in the Global Legal Entity Identifier database maintained by the Central Operating Unit.

 

Also with respect to this provision ESMA has adopted the stance that while issuers of financial instruments should ensure that their LEI is renewed according to the terms of any of the accredited Local Operating Units of the Global Entity Identifier System, operators of trading venues and systematic internalisers are not expected to ensure that the LEI pertaining to the issuer of the financial instrument has been renewed (Questions and Answers on MiFIR data reporting, 20 December 2016, ESMA/2016/1680, the pertinent question was: "[i]n the case where the issuer does not pay the annual fees for maintaining its LEI to the Local Operating Unit, what is the responsibility of operators of trading venues and systematic internalisers and what measures should be taken?")

 

The rule allowing lapsed LEIs to be used in financial transaction reporting has probably contributed to the stalled progress in the LEI's issuing - in 2016 there were 64,000 LEI's issued but 76,000 lapsed.

 

 

 

Questions and Answers on MiFIR data reporting, 20 December 2016, ESMA/2016/1680 

 

LEI of the issuer

 

Question 1 [Last update: 20/12/2016]

 

What action should be taken by the operator of the trading venue or the systematic internaliser in the cases where the LEI of the issuer cannot be obtained?

 

Answer 1

 

Operators of trading venues and systematic internalisers are advised to inform the issuers pertaining to the financial instruments concerned of their obligation to obtain the LEI of the issuer of every financial instrument in order to comply with the requirements under:

 

- Article 3(2) of the MiFIR RTS (Commission Delegated Regulation (EU) of 14.7.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the data standards and formats for financial instrument reference data and technical measures in relation to arrangements to be made by the European Securities and Markets Authority and competent authorities),

 

- Article 1 of the MAR RTS (Commission Delegated Regulation (EU) 2016/909 of 1 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the content of notifications to be submitted to competent authorities and the compilation, publication and maintenance of the list of notifications), and

 

- Article 2 of the MAR ITS (Commission Implementing Regulation (EU) 2016/378 of 11 March 2016 laying down implementing technical standards with regard to the timing, format and template of the submission of notifications to competent authorities according to Regulation (EU) No 596/2014 of the European Parliament and of the Council).

 

Trading venues and systematic internalisers are advised that the GLEIF has introduced the concept of 'Registration Agent'.

 

This facility will enable trading venues and systematic internalisers to assist the issuer applying for the LEI to access the network of LEI issuing organisations.

 

For more information on the 'Registration Agent' arrangements please refer to the following link https://www.gleif.org/en/lei-focus/how-to-get-an-lei-find-lei-issuing-organizations/registration-agents.

 

Question 2 [Last update: 20/12/2016]

 

When can an operator of trading venue(s) and systematic internaliser(s) populate field 5 of Table 3 of the Annex to the MiFIR RTS and related MAR RTS and ITS with its own LEI?

 

Answer 2

 

Operators of trading venues and systematic internalisers can populate field 5 of Table 3 of the Annex to the MiFIR RTS with their own LEI only where they create or issue themselves the financial instrument to be reported under the MiFIR and MAR obligations to supply reference data.

 

Question 3 [Last update: 20/12/2016]


 

In case the Issuer LEI code is missing but the Ultimate Parent Code LEI is available, can the latter one be used at least for a to-be-specified grace period?

 

Answer 3

 

No, it cannot. The information about the LEI of the issuer of the financial instrument is essential to determine the relevant competent authority pursuant to Article 16 of Commission Delegated Regulation (EU) of 28.7.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the reporting of transactions to competent authorities (RTS 22).

 

For this reason, it is essential that the LEI pertaining to the issuer of the financial instrument and not that of the ultimate parent of the issuer is provided.

 

In general, issuers should be aware of a number of existing EU obligations that already require the LEI of the issuers to be provided (e.g. MAR, EMIR and Transparency Directive (Commission Delegated Regulation (EU) 2016/1437 of 19 May 2016 supplementing Directive 2004/109/EC of the European Parliament and of the Council with regard to regulatory technical standards on access to regulatory information at Union level)).

 

Under MAR, the LEI of the issuer, in addition to being used in the context of providing reference data, is part of the mandatory information to be included in the notifications by persons discharging managerial responsibilities and by all persons closely associated with them (Commission Implementing Regulation (EU) 2016/523 of 10 March 2016 laying down implementing technical standards with regard to the format and template for notification and public disclosure of managers' transactions in accordance with Regulation (EU) No 596/2014 of the European Parliament and of the Council).

 

Under EMIR, the LEI is mandatory for the identification of all legal entities involved in the derivative contract to be reported to the EU Trade Repositories, including financial and non-financial counterparties that enter into derivative contracts, the beneficiary of derivative contracts, the broking entity and the clearing member.

 

Under the Transparency Directive Officially Appointed Mechanisms are obliged to obtain the LEI of the issuer of financial instruments admitted to trading on regulated markets.

 

Question 4 [Last update: 20/12/2016]


In the case where the issuer does not pay the annual fees for maintaining its LEI to the Local Operating Unit, what is the responsibility of operators of trading venues and systematic internalisers and what measures should be taken?


Answer 4


While issuers of financial instruments should ensure that their LEI is renewed according to the terms of any of the accredited Local Operating Units of the Global Entity Identifier System, under Article 3(2) of RTS 23 operators of trading venues and systematic internalisers are not expected to ensure that the LEI pertaining to the issuer of the financial instrument has been renewed.

 

 

 

 

 

 

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Last Updated on Thursday, 10 August 2017 08:02
 

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