LEI Code - Global Identifier for Financial Transactions

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What is an LEI Code?

The Legal Entity Identifier (LEI) is a 20-character, alpha-numeric code that provides a unique identification for any legal entity or structure that is a party to a financial transaction, in any jurisdiction. Developed by the International Organization for Standardization (ISO) under the ISO 17442 standard, the LEI connects to key reference information that enables the clear and unambiguous identification of legal entities.

The primary purpose of the LEI is to enhance transparency in financial markets and enable better risk management by both the public and private sectors. By providing a standardized identifier, the LEI helps regulators and market participants to:

• Accurately and reliably identify counterparties to financial transactions.

• Track and measure systemic risk across the financial system.

• Improve the quality and accuracy of financial data reporting.

• Reduce operational risks and costs associated with entity identification.

The Genesis of the LEI System

The 2008 global financial crisis highlighted significant deficiencies in the ability to identify counterparties and assess risk exposures across the financial system. The lack of a universal entity identifier made it difficult for regulators and financial institutions to understand the intricate web of interconnections and the potential for contagion.

In response to this, the Group of Twenty (G20) nations called for the creation of a global legal entity identifier system. This led to the establishment of the Global Legal Entity Identifier System (GLEIS) and the creation of the LEI code. The first LEIs were issued in December 2012.

Structure of the LEI Code

The 20-character LEI code has a specific structure that ensures its uniqueness and provides basic information about the issuing authority:

• Characters 1-4: A four-character prefix assigned to the Local Operating Unit (LOU) that issued the LEI. This helps to identify the issuer.

• Characters 5-6: Two reserved characters set to '00'.

• Characters 7-18: A 12-character alpha-numeric string that is the unique identifier for the legal entity. This portion is generated and assigned by the LOU.

• Characters 19-20: Two checksum digits, calculated according to the ISO 17442 standard, which help to prevent data entry errors.

The Global LEI System (GLEIS)

The GLEIS is a three-tier governance structure that ensures the integrity and operational efficiency of the LEI system:

1. Regulatory Oversight Committee (ROC): A group of public authorities from around the globe, established by the G20, that oversees the GLEIS to ensure it acts in the public interest.

2. Global Legal Entity Identifier Foundation (GLEIF): A not-for-profit organization founded by the Financial Stability Board in June 2014. The GLEIF is responsible for the operational integrity of the GLEIS, including accrediting LOUs and ensuring the quality and availability of the global LEI data pool.

3. Local Operating Units (LOUs): Also known as LEI issuers, LOUs are the organizations accredited by the GLEIF to issue LEI codes to legal entities. They are responsible for performing due diligence and validation of the entity's reference data. In India, Legal Entity Identifier India Ltd. (LEIL), a wholly-owned subsidiary of the Clearing Corporation of India Ltd. (CCIL), is the primary LOU.

Obtaining and Maintaining an LEI

Legal entities can obtain an LEI by applying to an accredited LOU. The application process typically involves providing necessary documentation to verify the entity's legal name, registered address, and other key information. Once issued, the LEI is valid for one year and must be renewed annually to ensure the accuracy of the associated reference data.

The reference data associated with an LEI, known as Level 1 data, answers the "who is who" question and includes information such as the legal name, registered address, and legal form of the entity. Additionally, the system also captures Level 2 data, which answers the "who owns whom" question by identifying the direct and ultimate parents of a legal entity.

According to the Global Legal Entity Identifier Foundation (GLEIF), an LEI code is designed to answer three critical questions when entering a corporate financial transaction:

1. who is who

2. who owns whom

3. who owns what

Regulatory Mandates and Benefits

Regulators across the globe have increasingly mandated the use of LEIs in various financial reporting and transaction requirements. In India, the Reserve Bank of India (RBI) has mandated the use of LEIs for all participants in the over-the-counter (OTC) derivatives, non-derivative markets, and for large corporate borrowers. The Securities and Exchange Board of India (SEBI) has also mandated LEIs for certain classes of market participants.

The benefits of obtaining and using an LEI are numerous:

• Regulatory Compliance: Meeting the mandatory requirements of financial regulators.

• Increased Transparency: Providing greater clarity on counterparty identity in financial transactions.

• Enhanced Risk Management: Enabling more effective assessment and management of counterparty and systemic risk.

• Improved Operational Efficiency: Streamlining know-your-customer (KYC) processes and reducing the costs associated with entity identification and verification.

• Global Recognition: The LEI is a globally recognized standard, facilitating cross-border transactions.

In conclusion, the LEI code has become an indispensable tool in the global financial architecture. By providing a clear and consistent method for identifying legal entities, the LEI system enhances transparency, strengthens risk management, and contributes to a more stable and efficient global financial market. As regulatory mandates continue to expand, the adoption and use of the LEI are expected to become even more widespread, further solidifying its role as a cornerstone of financial data infrastructure.