Category: European Union Electricity Market Glossary

Published: 24 May 2015

Last Updated: 14 October 2023

 

The Legal Entity Identifier (LEI) is a 20-character, alpha-numeric code, to uniquely identify legally distinct entities that engage in financial transactions.  Once a legal entity obtains an LEI code, the code stays with the legal entity for its existence.

7 July 2022   ESMA issues a third statement on the implementation of LEI requirements for third-country issuers, ESMA74-362-2566

 

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.

 

 

First LEIs were issued in 2012. 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).

Verena Ross, the ESMA’s Executive Director in a speech of 27 June 2018 (ESMA70-145-924) assessed that the total number of LEI issued globally has doubled from 550,000 LEIs in August 2017 to 1,097,000 LEIs in February 2018. She added that during the three months preceding the introduction of MiFID II, more than 100 000 LEIs were issued by month, while the average number of LEIs issued per month in 2016 was of 5.600 LEIs.

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 under a number of the European Union regulations and directives, 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 (Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 - CRR), 

- Central Securities Depositories Regulation (Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 - CSDR) - as regards CSDs, CSDs’ participants,

- Securities Financing Transactions Regulation (SFTR) – as regards parties involved in securities financing transactions and the beneficiaries of the rights and obligations arising from these,

- Transparency Directive (see 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) - as regards issuers of financial instruments listed on regulated markets, 

- Credit Rating Agencies Regulation (Commission Delegated Regulation (EU) 2015/2 of 30 September 2014 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to regulatory technical standards for the presentation of the information that credit rating agencies make available to the European Securities and Markets Authority (CRAR)) - as regards credit rating agencies and rated entities,

- Solvency II – as regards pension funds and insurance companies (see Guidelines on the use of the Legal Entity Identifier (LEI), EIOPA-BoS-14-026, 11 September 2014 and the EIOPA Solvency II Technical Specifications),

- Alternative Investment Funds Directive (AIFMD) – as regards funds and fund managers (see Final report Guidelines on reporting obligations under Articles 3(3)(d) and 24(1), (2) and (4) of the AIFMD, 15.11.2013, ESMA/2013/1339 (revised)),

- Prospectus Regulation (Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC) - as regards issuers of securities offered to the public or admitted to trading on a regulated market situated or operating within a EU member state.

 

Verena Ross, the ESMA’s Executive Director, in the aforementioned speech of 27 June 2018 has underlined the four key LEIs’ uses, from the financial market regulators’ perspective, as follows:

1. The LEI is the only data element allowing a unique and persistent identification of clients of financial institutions. This identification is crucial to supporting regulators’ activities in the area of market abuse supervision.

2. The LEI of the issuer is essential to determine which national authority is responsible for supervising relevant instruments such as bonds and related derivatives. For these instruments, according to MiFID II, the responsible supervisor is the one where the issuer is located (even if the instrument is traded elsewhere - for example, where a bond issued by a French issuer is traded in London, the UK Financial Conduct Authority (FCA) receiving the transaction data would need to transfer it to the French Authorite des Marches Financiers (AMF) in Paris). The information about the location of the issuer is only available in the LEI database. The lack of an LEI for a given financial instrument would mean that it would not be possible to establish which authority is responsible for supervising that instrument. Hence, the LEI code is the primary key that allows the 28 national supervisors to effectively exchange the transaction data between themselves.

3. The LEI is needed to support regulators’ work on transparency, and in particular in the context of ESMA’s transparency calculations, which determine whether or not orders and/or transactions in financial instruments are subject to real-time transparency. In order to ensure that ESMA is able to classify an instrument correctly, and hence to apply the correct transparency regime, ESMA relies for some asset classes on the LEI. For instance, ESMA uses LEIs to identify the underlying reference entity for single name CSDs and to identify the issuers of the underlying bond for bond futures. The LEI of the issuer is also used for the purpose of determining whether a derivative should be included in a suspension from trading, i.e. all instruments having the same issuer and/or the same underlying issuer may be subject to suspension.

4. The LEI is also needed to supervise the correct reporting by financial services firms and to monitor positions in commodities derivatives under the MiFID II position limits and position managements controls regime.

 

The brief overview of some of respective requirements 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.

 

 

It is also unequivocally underlined by the European Securities and Markets Authority (ESMA) in Guidelines Transaction reporting, order record keeping and clock synchronisation under MiFID II, 10 October 2016, ESMA/2016/1452 (p. 24).

According to Article 13(2) of the Commission Delegated Regulation (EU) 2017/590 of 28 July 2016 investment firm must 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 LEI, prior to obtaining the LEI from that client.

The MiFID II framework requires not only trading parties but also all reporting parties, including brokers, CCPs and beneficiaries, to report a valid LEI (analogous rule applies under EMIR Level 3 validations).

ESMA made the following list of entities required to be identified through the LEI under MiFIR:

- investment firms that execute transactions in financial instruments;
- the clients (buyer, seller) on whose behalf the investment firm executes transactions, when the client is a legal entity;
- -the client of the firm on whose behalf the trading venue is reporting under MIFIR Article 26(5), when the client is a legal entity;
- the person who makes the decision to acquire the financial instrument, when this person is a legal entity e.g. this includes investment managers acting under a discretionary mandate on behalf of its underlying clients;
- the firm transmitting the order;
- the entity submitting a transaction report (i.e. trading venue, ARM, investment firm); and
- the issuer of any financial instrument listed and/or traded on a trading venue.

The above entities will need to be identified with an LEI even if they had no previous legal obligation to obtain one and regardless of where they are operating or legally based (Briefing Legal Entity Identifier (LEI), 09 October 2017, ESMA70-145-238, p. 3).

 

 

The category of entities eligible to obtain LEI 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.

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

Links    Jurisdictions using LEI - GLEIF website   FCA website - MiFID II - Legal Entity Identifier (LEI)   For Asia/Pac Rim firms, becoming “MiFID II friendly” starts with getting an LEI

It is also 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.

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.

Verena Ross, the ESMA’s Executive Director, in the aforementioned speech of 27 June 2018 stressed that:

- EU investment firms and trading venues are obliged to report the LEI of all issuers regardless of where they are based and regardless of whether the entity is subject to LEI requirements in its own jurisdiction;

- the MiFID II rules also mean that all clients of EU investment firms need to have an LEI.

This has become known as the “no-LEI-no-trade” rule which prohibits EU firms to act on the instructions of a client who does not have an LEI. This means that the LEI code becomes a precondition for clients wishing to access the EU markets.

 

Temporary period of six months “to support the smooth introduction of the LEI requirements”

 

The requirement that the EU investment firms and EU trading venues are obliged to report the LEI codes ”regardless of where the clients or issuers are based and regardless of whether they are subject to LEI requirements in their own jurisdiction” is highlighted also in the “ESMA statement to support the smooth introduction of the LEI requirements” of 20 December 2017 (ESMA70-145-401). However, “to support the smooth introduction of the LEI requirements”, ESMA allowed for a temporary period of six months that:

- investment firms may provide a service triggering the obligation to submit a transaction report to the client, from which it did not previously obtain an LEI code, under the condition that before providing such service the investment firm obtains the necessary documentation from this client to apply for an LEI code on his behalf; and

- trading venues may report their own LEI codes instead of LEI codes of the non-EU issuers while reaching out to the non-EU issuers.

The above temporary period allowing for a smooth introduction of the use of LEIs, brought-in in December 2017, ceases on 2nd July 2018 (inclusive) and, according to the ESMA statement of 20 June 2018 (ESMA70-145-872), will not be extended.

 

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).

Moreover, on 4 February 2019 ESMA has updated Questions and Answers on MiFIR data reporting (ESMA70-1861941480-56, Question 5) and confirmed that field 5 (issuer or operator of the trading venue identifier) of Table 3 of the Annex to RTS 23 and related MAR RTS and ITS should be populated operators of trading venues and systematic internalisers with the LEI of the firm’s head office, even if the branch may be considered eligible for a LEI in some cases.

 

LEI of the issuer of the financial instrument

 

In the document on LEI of 09 October 2017 (ESMA70-145-238, p. 4) ESMA stressed that the LEI of the issuer of the financial instrument is crucial for market surveillance. The LEI code is needed to determine which national supervisor is responsible for monitoring the market activity in relevant instruments such as bonds and derivatives. For these instruments, MiFIR says that the responsible supervisor should be the one where the registered office of the issuer is located; the information about the location of the registered office is only available in the LEI reference data.

The lack of the LEI or the incorrect LEI for a given financial instrument would mean that it will not be possible to establish which supervisor is responsible for that instrument or that the instrument will be assigned to the wrong supervisor. For this reason, ESMA does not accept any solution that would waive or mitigate the obligation to report this information.

 

Obligations put on investment firms with respect to LEIs

 

In is unequivocally underlined in the ESMA’s document on LEI of 09 October 2017 (ESMA70-145-238, p. 4) that an investment firm reporting under MiFIR Article 26 should have appropriate arrangements in place in order to collect and verify the LEI of its client before the transaction takes place. In particular, investment firms have to ensure that the length and construct of the code are compliant with the ISO 17442 standard, that the code is included in the Global LEI database and that it pertains to the client concerned.

Also an operator of a trading venue reporting under MiFIR Article 27 should have appropriate arrangements in place in order to collect and verify the LEI of the issuer of the financial instrument admitted to trading or traded on its venue. In particular, operators of trading venues have to ensure that the length and construct of the code are compliant with the ISO 17442 standard, that the code is included in the Global LEI database and that it pertains to the issuer concerned.

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, 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 (which mirrors the above ESMA’s 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.

Also in the document on LEI of 09 October 2017 (ESMA70-145-238, p. 4) ESMA clearly accentuated that “both investment firms and operators of trading venues are not required under MiFIR to ensure that the reference data pertaining to client’s or issuer’s LEIs is up-to-date. However, investment firms and operators of trading venues must ensure that their own LEIs reference data are kept up to date.”

 

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(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. 

 

 

LEI under EMIR

 

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 (see Article 3 of Commission Implementing Regulation (EU) No 1247/2012), the role of LEI in the reporting process under the EMIR Regulation is described in greater detail here).

 

LEI under MAR

 

Under MAR, the LEI of the issuer 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 MAR LEI is also used in the context of providing reference data, 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 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).

  

LEI under the Transparency Directive

 

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

 

LEI under REMIT

 

In the REMIT compliance system ACER code and the LEI may be used interchangeably.

 

How to apply for an LEI

 

 

According to the ISDA, GFMA, AFME, ASIFMA and SIFMA, an LEI is issued within 24 to 48 hours of application.

A Local Operating Unit may charge a fee for allocating the LEI. The precise fee is at the discretion of the Local Operating Unit.  

Verena Ross, Executive Director at the ESMA in “Keynote address, ASIFMA Annual Conference 2017 – Hong Kong“ of 30 November 2017 (ESMA71-319-65) estimates that “it is a matter of several days to get assigned an LEI at an average cost of a 100 Euro”.

 

Exemplary provisions in the agreement regarding the LEI 

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