The FSB looks to evaluate the progress made by members in adopting LEI.
The responses to the consultation and questionnaires sent to national authorities of FSB Members will be published in a peer review report in the first half of 2019.
The Bank of England is also considering mandating LEI as part of the development of its common credit message for UK payment systems.
Sources: Financial Stability Board, Bank of England
Point of View
The origins of the Legal Entity Identifier (LEI) can be traced back to the global financial crisis of 2008, in particular some of the issues relating to the collapse of Lehman Brothers. According to report by McKinsey, the complex legal structure of that organisation meant “financial regulators and market participants found it impossible to reliably assess counterparties’ exposure to Lehman’s entities and to each other”.
As a result of this, the G20 and the Financial Stability Board (FSB), realised that they needed a universal way in which to identify legal entities. This led to the creation of the Global Legal Entity Identifier System.
Established in June 2014 by the FSB, the Global Legal Entity Identifier Foundation (GLEIF), based in Basel, Switzerland, is tasked to support the implementation and use of the LEI. The foundation is backed and overseen by the LEI Regulatory Oversight Committee, representing public authorities from across the globe with the aim to drive further transparency within the global financial markets.
The LEI is a 20-digit, alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). According to the GLEIF:
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.
Whilst the implementation of LEIs seems sensible and good policy from a number of perspectives including mitigating risk and know your customer (KYC) requirements, the uptake of LEIs to date has focused around the trade in complex financial instruments.
LEIs have been required under a number of EU regulations and directives, but the uptake of LEIs is expected to increase further with the implementation of the EU Markets in Financial Instruments Directive II (MiFID II) legislative requirements from 3 January 2018. The resulting increased usage of LEIs is driving exposure and raising their profile.
This increased exposure, and the fact the FSB is chaired by Mark Carney, Governor if the Bank of England (BoE) could be a reason why the BoE, in its recent consultation paper on introducing ISO20022 into UK payments, gives consideration to LEIs as part of the development of a ‘Common UK Credit Message’ (CCM).
The CCM would be a standard message that would be across CHAPS, Faster Payments and Bacs, and would be compatible with ISO 20022. This change is being enabled by the planned delivery of two major UK payment infrastructures, a renewed Real Time Gross Settlement (RTGS) for CHAPS payments, and the New Payments Architecture (NPA) for Bacs and Faster Payments.
ASIC is a member of the FSB Regulatory Oversight Committee for LEI, which monitors the operation of the GLEIF and develops policies and standards to increase the use and improve utility of LEIs. According to ASICs Regulatory Guide 223, a market participant in Australia may identify the origin of an order (in an Exchange Market) by using one of a number of identifiers for the client. There are a number of identifiers that can be used one of which is the LEI. ASIC goes on to say, “Going forward, we will continue to monitor the effectiveness of identifiers”.
According to McKinsey the LEI must be able to work within existing systems as adoption increases. An example is GLEIF’s plan to reconcile to and confirm SWIFT’s full Business Identifier Code (BIC)-to-LEI mapping. The BIC (ISO 9362) is commonly used as part of messaging, which financial institutions use to communicate, and is also used in SWIFT’s KYC utility. Of the approximate 130,000 BICs assigned to date, currently some 45,000 qualify for the mapping against LEIs.
In addition, the increasing usage of ISO 20022 for payment systems in particular for real-time payments, may provide further use cases for LEI implementation, in tackling fraud. The recently launched New Payments Platform (NPP) already utilises ISO 20022. It is likely there will be a review of new messaging standards for other payment streams in Australia such as BECs, HVCS which could provide an opportunity to consider the merits of extending LEI usage domestically.