The Legal Entity Identifier (LEI) is unique global identifier of legal entities participating in financial transactions. These can be individuals, companies or government entities that participate in financial transaction. The identifier is used in reporting to financial regulators and all financial companies and funds are required to have an LEI.
The identifier is formatted as a 20-character, alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). It connects to key reference information that enables clear and unique identification of legal entities participating in financial transactions. Each LEI contains information about an entity’s ownership structure and thus answers the questions of 'who is who’ and ‘who owns whom’. Simply put, the publicly available LEI data pool can be regarded as a global directory of participants in the financial market.
At the time of the financial crisis of 2007–2008, regulators realised that a single identification code unique to each financial institution was not available worldwide. It means that each country had different code systems to recognize the counterpart corporation of financial transactions. Accordingly, it was impossible to identify the transaction details of individual corporations, identify the counterpart of financial transactions, and calculate the total risk amount. This resulted in difficulties in estimating individual corporation's amount of risk exposure, analyzing risks across the market, and resolving the failing financial institutions. This is one of the factors that made it difficult for the early evolution of the financial crisis.
In response, the LEI system was developed by the 2011 G20[1] in response to this inability of financial institutions to identify organisations uniquely, so that their financial transactions in different national jurisdictions could be fully tracked.[2] Currently, the Legal Entity Identifier Regulatory Oversight Committee (LEI ROC (http://www.leiroc.org)), a coalition of financial regulators and central banks across the globe, is encouraging the expansion of the LEI. In a firsth moment, the U.S. and European countries required corporations to use the legal entity identifier when reporting the details of transactions with over-the-counter derivatives to financial authorities. As today, authorities of 45 jurisdictions mandate the use of LEI code to identify legal entities involved in different financial transactions. The first LEIs were issued in December 2012.[3]
Code structure
The technical specification for LEI is ISO 17442.[2] An LEI Structure of LEI codes consists of a 20-character alphanumeric string, with the first four 1 2 3 4 5 6 7 8 9 ... 18 19 20 characters identifying the local operating unit (LOU) that issued LOU Res- Entity- Check- the LEI. Characters 5-18 are the unique alphanumeric string code erved Identification sum assigned to the organisation by the LOU. The final two characters G.E. Financing GmbH
G20: An international organization consisting twenty major countries (ninety per cent of the world's GDP) comprising seven developed countries (G7), the chair countries of the European Union, and twelve rising nations.
Financial Stability Board: An organization founded to enhance the stability of the global financial system and to oversee international finance.
Regulatory Oversight Committee (https://www.leiroc.org/): The best decision making organization for LEI Systems under FSB. The forty countries' financial authorities, the central bank, and IMF are represented as members by international organizations. GLEIF (Global LEI Foundation): Responsible for controlling the LOUs in each region as a practical operating organization within the LEI system.
Both corporations and funds involved in financial transactions need the LEI. LEI is an identification code designed to recognize all of the entities and funds involved in financial transactions worldwide.
Therefore, all corporations and funds that participate in financial transactions should be issued LEI.
When is an LEI needed?
In the United States and Europe, the parties to the transactions must use the LEI to report to the supervisory authorities any out-of-books derivatives transactions. Recently, it has expanded their coverage such as alternative investments, fund investments, insurance, spot markets, pensions, logistics and bids.
In financial transactions, you can reduce the risk associated with the counterpart. You can measure the total risk of the other party. You can also determine the risk of a particular trading partner's concentration.
You can reduce the cost of reporting tasks. Financial transactions reduce the costs of information gathering and administrative costs to the other party. You can also reduce the cost of various reporting tasks, such as reporting the details of out-of-court derivatives transactions and reporting of the regeneration and cleanup plans.
You can enhance market transparency. As LEI is a code of international currency, it is easy to detect market manipulation, financial fraud and other disruption acts through the sharing of international financial transaction information.
