Legal Entity Identifier News: January 2018 Update

Global Legal Entity Identifier Foundation provides an overview of the latest global developments relevant to Legal Entity Identifier adoption

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To make it easy for stakeholders to follow global developments relevant to Legal Entity Identifier (LEI) rollout, we provide related updates via the GLEIF Blog. This blog post summarizes LEI news tracked since September 2017.

Sources cited in this blog are included in the ‘related links’ below.

International Chamber of Commerce on LEI in trade finance: Worldwide LEI mandate “would be a game-changer in reducing the operational costs of KYC compliance.”

In January 2018, Euromoney ran an article titled ‘Trade Finance Survey 2018: Plugging the trade finance gap’. The article made the point that while the “impediments to providing more trade finance to emerging-market clients are well known […] that does not make them any easier to overcome” and it asked whether “the ultimate solution [could] be in turning trade finance into an attractive asset class for institutional investors?”

In its exploration of ways to make this achievable, the article asserts that costs could be cut and efficiencies enhanced through the broader adoption of LEIs, “which would automate identity verification and allow for the digitization of a number of the steps involved in trade finance transactions.” Reference is then made to a paper published in October 2017 by McKinsey and the Global Legal Entity Identifier Foundation (GLEIF) which reports that on an annual basis, “banks could potentially collectively save between $250 million to $500 million per annum if LEIs were used to identify international entities and to automate the tracing of their history for the issuance of letters of credit.” The Euromoney article puts these savings into perspective by highlighting that “the McKinsey/GLEIF paper reckons that at their maximum potential, they would represent 4% of the current global trade operations cost base.”

Demonstrating the International Chamber of Commerce’s (ICC) advocacy for LEIs, Daniel Schmand, head of trade finance at Deutsche Bank and ICC Banking Commission chair, comments: “At the ICC, we have encouraged the UN to support us in lobbying to make LEIs mandatory across the world […]. We believe this would be a game-changer in reducing the operational costs of KYC compliance.” The article muses that it is “Small wonder that trade finance bankers are wholehearted supporters of the wider use of LEIs. So is the ICC’s Banking Commission […].” The final word goes to Schmand, who observes: “The impact of making LEIs an industry standard […] would be at least twofold. Cost reductions would support banks’ return on equity goals, while the enhanced economics of trade-related SME lending would help to make more inroads into the trade finance gap by minimizing on-boarding costs.”

The article serves to reinforce observations that GLEIF has previously made in a blog, available on the GLEIF website, titled ‘From Counterparty Identification to Business Value: The Use of the LEI in Trade Finance’. In this blog, GLEIF explains that the LEI makes two key activities in the complicated trade finance process far simpler: verification of entities and tracking an entity’s history. In addition to the annual potential savings which could be made, as outlined above, GLEIF highlights that the use of LEIs would also facilitate better risk management by allowing banks to maintain a more holistic view of the transacting entity. GLEIF encourages organizations to consider the adoption of LEIs in their day to day processes. The sources above support this position by clearly evidencing the cost savings and efficiency gains that LEIs could deliver to the trade financing operations of banks globally, and highlighting the ICC’s advocacy for the LEI.

Asia Securities Industry & Financial Markets Association proposes LEI for new investor identification model for northbound trading activity on Hong Kong Exchanges and Clearing’s Stock Connect program

In November 2017, it was reported in Global Custodian that the “Hong Kong Exchanges and Clearing (HKEX) has proposed a new model for investor identification (ID) for northbound trading activity on its Stock Connect programme.” The story also appeared in Funds Global Asia in December 2017, where it was reported that the industry group, the Asia Securities Industry & Financial Markets Association (ASIFMA), hopes that “the scheme would issue ID numbers to fund managers rather than to individual funds.” ASIFMA suggested that the LEI system could provide the template. Mark Austen, chief executive of ASIFMA, is quoted in both articles as saying: “With respect to the ID, we propose the use of LEI in line with global harmonisation, which most foreign institutional investors should be using already in compliance with MiFID II.”

European Union: European Securities and Markets Authority on LEI implementation under MiFID II / MIFIR

On 9 October 2017, the European Securities and Markets Authority (ESMA) published a briefing on the LEI as part of its efforts to raise industry awareness and facilitate compliance with the LEI requirements under the European Union (EU) revised Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR), which took effect on 3 January 2018. The MiFID II / MiFIR implementing legislative acts require a significant number of actors within and outside the EU – who previously were under no similar obligation – to obtain an LEI. According to MiFIR, investment firms should obtain LEIs from their clients before providing services which would trigger related reporting obligations.

In its October 2017 press release announcing the publication of the LEI briefing, ESMA stated that it expected “market participants to take all necessary steps to ensure full compliance with the LEI requirements under MiFID II. Based on its previous experience with EMIR [European Infrastructure Regulation] reporting, ESMA urges reporting entities not to delay in addressing this important matter, as advance preparation will help in avoiding backlogs and ensuring that all market participants are ready for the new regime.”

In a statement published on 20 December 2017, ESMA outlined that in “the last weeks, ESMA and national competent authorities (NCAs) learnt that not all investment firms will succeed in obtaining LEI codes from all their clients ahead of the entry-into-force of MiFIR on 3 January 2018. The same may be the case for trading venues’ non-EU issuers whose financial instruments are traded on European trading venues. In that context, and to support the smooth introduction of the LEI requirements, ESMA will allow 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 report their own LEI codes instead of LEI codes of non-EU issuers currently not having their own LEI codes.”

For details on the extraordinary growth of the LEI population during the last months leading up to the MiFID II / MiFIR deadline, refer to the last section in this blog titled ‘Since January 2018, the LEI data pool covers more than one million legal entities’.

India: Reserve Bank of India mandates LEI for large corporate borrowers

In October 2017, the Indian Express was one of many media outlets to cover a significant regional development. A news article confirmed that after making the LEI “mandatory for transactions in interest rate, forex and credit derivative market, the Reserve Bank of India (RBI) is set to make LEI compulsory for companies having aggregate fund-based and non-fund based exposure over Rs 5 crore.” The article explained that the LEI “will help banks in monitoring the aggregate exposure of corporate borrowers. It would also enable banks in preventing multiple loans to companies against the same collateral.” Reporting on the same story in the same month, Lexology noted that LEI, “as brought forth by G20 […] distinguishes the legal entities engaged in financial affairs. […] A number of challenges arise as consequences of uncertainty with regards to the ownership of the companies.” It suggests that adoption of the LEI would be a pragmatic approach to addressing these challenges and notes its role in facilitating “transparency in tracking the ultimate ownership thereby identifying the ultimate beneficiaries of the financial system being run through subsidiaries.”

In a further article, published in December 2017, Indian Express examined the narrowing of the bad loan recovery gap between global banks and Indian banks. It suggested that “a mandatory legal entity identifier in CRILIC [central repository of information on large credits] for all borrowers of more than Rs 1,000 crore by March 2018 and more than Rs 50 crore by December 2019” is a preventative measure from the RBI which complements current bankruptcy changes.

A notification on the RBI website recognizes that the LEI has a central role in improving the quality and accuracy of financial data systems for better risk management. It states that “banks shall advise their existing large corporate borrowers having total exposures of ₹ 50 crore and above to obtain LEI as per the schedule given in the Annex” referencing an Annex to the notification. The RBI also makes it clear that “Borrowers who do not obtain LEI as per the schedule are not to be granted renewal / enhancement of credit facilities.” It indicates that publication of a separate roadmap for borrowers with exposure between ₹5 and ₹50 crore will follow in time and urges banks to encourage large borrowers to obtain an LEI for their parent entity, subsidiaries and associates.

United States:

New online tool, introduced by the Consumer Financial Protection Bureau, supports new LEI requirements under Home Mortgage Disclosure Act

Changes to the Home Mortgage Disclosure Act (HMDA) were imposed from January 1, 2018. These resulted from the U.S. Consumer Financial Protection Bureau’s (CFPB) final rule amending Regulation C, which implements the HMDA. As outlined in a blog available on the GLEIF website, titled ‘Are You a Mortgage Originator in the U.S.? LEI is a Mandate for Home Mortgage Disclosure Act (HMDA) Reporting’, among the new data points required to be collected, recorded and reported under HMDA is the LEI of the home mortgage loan originator and the universal loan identifier, which also incorporates the LEI. In advance of the changes coming into force, in late December 2017, JD Supra reported that the CFPB had launched an online Digital Check Tool, which could be used by companies reporting HMDA data from January 1, 2018. It specified that “the new tool supports the Universal Loan Identifier (ULI) requirements of the revised HMDA rule.” One of its functions is “to generate a two-character check digit when a company enters a Legal Entity Identifier and loan or application ID.” 

LEI will be collected with data for the Benchmark Survey of Foreign Direct Investment

As reported by a blog available on the GLEIF website, titled ‘Legal Entity Identifier News: August 2017 Update’, in July 2017 the website of the Federal Register - The Daily Journal of the United States Government published details of a proposed rule from the Department of Commerce’s Bureau of Economic Analysis (BEA), to include a question on LEIs on the Benchmark Survey of Foreign Direct Investment in the United States. The benchmark survey takes place every five years.

GLEIF is pleased to report that in December 2017, the same website published the BEA’s final rule amending its regulations to set forth the reporting requirements for the 2017 BE-12, Benchmark Survey of Foreign Direct Investment in the United States. In its publication, the BEA confirmed that the “following items are added to the benchmark survey: […] (4) Add a question to collect the 20-digit Legal Entity Identifier of the U.S affiliate on the BE-12A and BE12B forms.” The final rule became effective on January 12, 2018.

Rules adopted by the Securities and Exchange Commission impose use of LEI to enhance adviser reporting

In August 2017, JD Supra reported that advisors should be aware of several amendments to Form ADV which have been imposed as a result of recently enacted Security and Exchange Commission (SEC) rules.

In a section of the JD Supra article titled ‘Clarifying and Technical Amendments to Form ADV’, it explains that the SEC has adopted several amendments to clarify its position on frequently asked questions. It states: “Question 25.(g) has been added to solicit the legal entity identifier for any private fund custodian that is not a broker-dealer or that is a broker-dealer but that does not have an SEC registered identification number […].” According to the article, the amendments “will apply to all Form ADVs filed after September 31, 2017 (for most advisers with a December 31-year end, the enhanced reporting will first apply to their annual amendment due March 2018).”

Securities and Exchange Commission delays data reporting rule citing cybersecurity concerns and communicates new implementation dates relevant to LEI requirements

The decision by the Securities and Exchange Commission (SEC) to postpone the compliance date for filing new reports on Form N-PORT was reported by a number of news outlets in December 2017, thanks to a press release authored by Diana E. McCarthy, partner in the Investment Management Practice Group, and Killilyn Greco, associate, at DrinkerBiddle. Form N-PORT is “one of the SEC’s new measures to modernize and enhance disclosures for investment companies”. As explained in the National Law Review, “Compliance with Form N-PORT will also require investment companies to obtain and report a Legal Entity Identifier (LEI) number of the registrant and each series […]. This will require funds or registrants to obtain an LEI if they have not done so already, which currently entails a one-time registration fee and a modest yearly fee to cover maintenance costs. [...]. Finally, funds will have more time to obtain an LEI, if they have not already done so.”

The National Law Review provides the following information on the new reporting deadlines: “The postponement means that the reporting deadline for large firms is April 30, 2019, while the new deadline for smaller complexes is one year later on April 30, 2020. Note, however, that larger fund complexes with net assets of $1 billion or more will still be required to maintain Form N-PORT information internally and make it available to the SEC upon request in lieu of filing the form on EDGAR, beginning with the initial compliance date of June 1, 2018.”

Data Foundation and LexisNexis® Risk Management publish a report: ‘Who is Who and What is What? The Need for Universal Entity Identification in the United States’

In September 2017, as reported on the Data Foundation website, Data Foundation and LexisNexis® Risk Solutions published their co-authored report, titled ‘Who is Who and What is What? The Need for Universal Entity Identification in the United States’. According to Data Foundation it “outlines the need for the U.S. government to adopt a universal method of entity identification in order to verify companies, nonprofits, and other organizations using a single, common unique identifier. More than 15 government, private sector, and tech experts were interviewed for this report. The solution to this need already exists: the global Legal Entity Identifier (LEI), which is already used by over 90 government agencies around the world. The LEI is a standard, non-proprietary, verified identification code that is managed by a global, federated system. It already enjoys support from major players in the financial industry. Implementation of the LEI across all U.S. government reporting would have a range of benefits for industry, governments, watchdogs, and, ultimately, taxpayers. The LEI would create a single electronic view of all legal entities, knit together from their existing government reports - bringing transparency for investors, efficiency for regulatory agencies, and lower costs for the entities.”

The report provides a comprehensive overview of its subject matter, initially examining why the U.S. needs universal entity identification, before making the case that universal adoption of the LEI is the solution. It presents the challenges of universal LEI adoption and outlines multiple requirements to meet those challenges. In a powerful conclusion, it reiterates the value of a global system of entity identification and restates the authors’ advocacy for mandated use of the LEI across U.S. government operations: “A global system for trustworthy, interoperable entity identification will have a range of benefits for industry, governments, watchdogs, and ultimately taxpayers. It will reduce risk in our financial system, help root out waste and fraud in government procurement, save business money through automated compliance and increased data quality, and improve the quality of insights provided by business intelligence firms, journalists, researchers, watchdogs, and more. The LEI is that system. It is global, and gaining momentum globally every day. It is non-proprietary, and its foundation is built on open data principles. Its data is verified and of high quality. It is flexible and adaptable to a range of uses, some of which haven’t even been conceived yet. Congress and the White House should mandate a government-wide move to adopt the LEI universally, across all the U.S. government’s regulatory and reporting operations.”

Global:

Global LEI System standards: LEI Regulatory Oversight Committee consultation on funds relationships

In September 2017, the LEI Regulatory Oversight Committee (LEI ROC) published its ‘Consultation Document on Funds Relationships in the Global LEI System’, developed by its Committee on Evaluation and Standards (CES). It was noted in the executive summary of the document that the “present report proposes a limited update to the way relationships affecting funds are recorded in the Global LEI System (GLEIS), with the objectives of making sure that the implementation of relationship data is consistent throughout the GLEIS and provide a means to facilitate a standardized collection of fund relationship information at the global level.” The document continues that the proposal is “to replace the current optional reporting of a single “fund family” relationship as part of Level 1 (reference data of the entity) with the following relationships, as part of “Level 2” data (relationship data):

• “Fund Management Entity” […].
• “Umbrella Funds” […].
• “Master-Feeder” […].
• “Other Fund Family” […].”

The report sought public input on the design of a process for collecting data on the relationships of funds within the GLEIS. Responses to an associated questionnaire were invited by late November 2017 and the indication was that these will help to shape the final policy framework that will be approved by the LEI ROC for implementation by GLEIF. The report stated that implementation “would not take place before January 2019.”

Second Progress Report published by the International Monetary Fund and Financial Stability Board: ‘The Financial Crisis and Information Gaps - Second Phase of the G-20 Data Gaps Initiative’

As defined by Eurostat, the statistical office of the EU situated in Luxembourg, “the G20 Data Gaps initiative is a set of 20 recommendations on the enhancement of economics and financial statistics”. The initiative was launched to improve the availability and comparability of economics and financial data in response to the market turmoil created by the financial crisis in 2007-2008. This highlighted “the need of broader datasets for policy makers and supervisors to better assess the evolution of the economy, as well as the intervention required.”

In September 2016, the ‘First Progress Report of the Second Phase of the Data Gaps Initiative (DGI-2)’ was welcomed by the G20 leaders, who supported the proposed action plans for the implementation of the DGI-2 recommendations. More recently, in September 2017, the staff of the International Monetary Fund (IMF) and the Financial Stability Board (FSB) Secretariat, in close coordination with the participating economies and the Inter-Agency Group on Economic and Financial Statistics (IAG) member agencies, prepared and published ‘The Financial Crisis and Information Gaps - Second Phase of the G-20 Data Gaps Initiative (DGI-2) Second Progress Report’. It provides an overview of progress since September 2016 and “seeks the endorsement of G-20 Finance Ministers and Central Bank Governors (FMCBG) of progress to date and the DGI-2 action plans and timetables going forward”.

Of particular significance, section IV of this latest report examines synergies between the implementation of the DGI-2 recommendations and other relevant workstreams, including the LEI. Within this section, the global expansion of the LEI initiative is acknowledged. The report cites the issuance of around 540,000 LEIs as of mid-August 2017 and the adoption of over 50 national or regional acts and rules related to the LEI, in more than 40 jurisdictions. (According to GLEIF data, as of January 2018, more than one million LEIs were issued globally.)

The report also recognizes the value that broad LEI adoption will deliver: “While […] [the LEI’s] usefulness reaches beyond statistical uses, the wide adoption of a global entity identifier may greatly enhance statistical compilation, notably in the management and aggregation of granular data. […] Expanded use will also bring down the cost per LEI, and consideration of potential business model changes may also facilitate use beyond financial institutions.” It also notes that the May 2017 launch of data collection on the ultimate and direct parents of entities with LEI, has expanded the value of the LEI for statistical and financial stability purposes, based on accounting consolidation. Further, it asserts that publicly available links to other identifiers also enhance LEI value for users. With specific reference to the progress being made on joint projects to develop mapping between the LEI and both the Business Identifier Code (BIC) and the International Securities Identification Number (ISIN), the report acknowledges that “When released as a public good, these mappings will be kept current on an ongoing basis. Furthermore, the inclusion of the LEI in existing business registers used in the statistical production—with establishment of links to the existing identifiers—is currently sought as this would leverage the expansion of the LEI. Among other benefits, this would also contribute to the extension of the LEI to nonfinancial private entities, thus providing support to other efforts to identify systemic risk chains involving such entities […].”

Financial Stability Board consults on the governance of the unique product identifier (UPI)

In October 2017, the Financial Stability Board (FSB) issued a press release titled ‘FSB publishes consultation on Unique Product Identifier (UPI) governance’. The release announced publication of a consultation document on proposed ‘Governance arrangements for the unique product identifier (UPI)’, which “sets out proposals for the governance arrangements for a global UPI, as a key harmonised identifier designed to facilitate effective aggregation of transaction reports about over-the-counter (OTC) derivatives markets.”

To put this consultation in context of the LEI, in 2009 the G20 leaders agreed that all OTC derivatives transactions should be reported to trade repositories. One of the key problems identified as a result of the financial crisis was the lack of transparency in the OTC derivatives markets. Trade reporting is a key element in identifying and addressing financial stability risks from these markets. As such, a UPI is intended to identify the product which is the subject of OTC derivatives transactions. As explained in the press release (notes to editors section): “In September 2014 the FSB published the final report of the Aggregation Feasibility Study, which recommended a number of key preparatory steps that should be undertaken to enable effective global aggregation of OTC derivatives trade reporting data. In particular, the report recommended the following steps would be needed irrespective of the particular aggregation model chosen:

• The work to establish uniform global identifiers, i.e. agreement on a unique transaction identifier (UTI) and UPI as well as adoption of the Legal Entity Identifier (LEI), should be accelerated to ensure that OTC derivatives data can be adequately aggregated.”

The FSB consultation document published in October 2017 “identifies key criteria and functions for the UPI governance arrangements for consultation and also seeks specific feedback on certain issues relating to UPI service provider(s), cost recovery and fee models, and the reference data library that will underlie the UPI system. The FSB expects to publish a further consultation in early 2018 on proposals for the allocation of the UPI governance functions to various entities and further aspects of the UPI service provider model.”

Financial Stability Board publishes governance arrangements and implementation plan for the unique transaction identifier (UTI)

The Financial Stability Board (FSB) published a further document in January 2018, titled ‘Governance arrangements for the unique transaction identifier (UTI): Conclusions and implementation plan’. A press release on its website indicates that this work is also connected to the same agreement amongst G20 leaders mentioned above that all OTC derivatives transactions should be reported to trade repositories. It affirms that the UTI is a key global harmonized identifier for reporting OTC derivative transactions and that in particular it is “designed to facilitate effective aggregation of transaction reports.” The report concludes that governance arrangements for UTI should include:

• “a recommendation that jurisdictions implement the UTI no later than end-2020;
• the designation of the International Organization for Standardization (ISO) as the responsible body for publishing and maintaining the UTI data standard; and
• the designation of CPMI [Committee on Payments and Market Infrastructures] and IOSCO [International Organization of Securities Commissions] as the appropriate bodies to undertake the governance functions allocated to an International Governance Body relating to the UTI on an interim basis.

The FSB believes there may be benefits to having a common governance framework, consisting of one or more international bodies, for the UTI and unique product identifier (UPI). Therefore, the FSB considers that the final identification of the International Governance Body should take place contemporaneously with the FSB making its conclusions on the UPI Governance Arrangements. In that regard, the FSB recently consulted on governance arrangements for the UPI and published the consultation responses [see above].  In 2018, the FSB will engage in further dialogue with the industry and other stakeholders ahead of reaching its final conclusions on the UPI governance arrangements, including through a second public consultation.”

As with the press release issued by the FSB in October (referenced in the preceding section in this blog), the notes to editors of this January FSB press release contain the following explanation of how this work item is connected to the global LEI initiative: “In September 2014 the FSB published the final report of the Aggregation Feasibility Study, which recommended a number of key preparatory steps that should be undertaken to enable effective global aggregation of OTC derivatives trade reporting data. In particular, the report recommended the following steps would be needed irrespective of the particular aggregation model chosen:

• The work to establish uniform global identifiers, i.e. agreement on a unique transaction identifier (UTI) and UPI as well as adoption of the Legal Entity Identifier (LEI), should be accelerated to ensure that OTC derivatives data can be adequately aggregated.”

ProgrammableWeb names GLEIF’s LEI Look-up API as one of the most interesting APIs of 2017

ProgrammableWeb, which asserts its position as the world's leading source of news and information about Internet-based application programming interfaces (APIs), ran an editorial feature in late December 2017 titled ‘ProgrammableWeb’s Most Interesting APIs in 2017: Payments, Banking, Blockchain and Finance’. It noted a specific focus on payments, banking, cryptocurrency and blockchain and financial APIs and highlighted that it had detailed the “most interesting APIs of the bunch” according to its research staff, web traffic and social media mentions.

GLEIF is very happy to report that the GLEIF API was recognized within the “Trading and Other Finance API Highlights” category. The entry reads as follows: “Global Legal Entity Identifier Foundation (GLEIF) is the supporting nonprofit organization of the Legal Entity Identifier (LEI). The LEI helps identify legal entities that participate in financial transactions. GLEIF provides open, standardized, quality legal entity reference data. The GLEIF API provides developers with the opportunity to directly access the complete LEI data pool in real time and to perform on-demand compliance checks for changes to specific LEI records.”

The LEI Look-up API was only launched in September 2017, and such early objective endorsement of its interest is very welcome. The application responds to market needs identified during a beta test, carried out in 2017, which involved multiple LEI stakeholders including financial institutions, regulators, fintech companies and analysts seeking to include LEI data in automated processes. The GLEIF LEI Look-up API can easily be integrated into internal systems based on the widely supported JSON data format. Use of the API is free of charge and does not require registration. To access the API and adjacent documentation, please refer to the ‘related links’ below.

Since January 2018, the LEI data pool covers more than one million legal entities

As of 6 January 2018, the LEI data pool covers more than one million legal entities globally. In 2017, the LEI population essentially doubled to about 953,000 LEIs. Of the almost 500,000 LEIs issued in 2017, 77 percent were issued in the fourth quarter: in October 2017, LEI issuing organizations issued 105,525 LEIs, followed by 118,195 LEIs in November and 163,059 LEIs in December. In December 2017, the volume of LEIs issued daily peaked at over 10,000. Growth was particularly high in EU countries with the highest increase observed in UK, Germany and The Netherlands, respectively. GLEIF attributes the high rate of newly issued LEIs primarily to impacted market participants seeking to achieve compliance with MiFID II / MiFIR, which took effect on 3 January 2018.

The extraordinary growth managed in the fourth quarter of 2017 demonstrates the robustness of the Global LEI System and the strong capabilities built by the LEI issuing organizations to handle a massive surge in LEI registrations. This is further substantiated by the very high level of data quality maintained throughout the reporting period as demonstrated with the data quality reports published monthly by GLEIF.

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