Legal Entity Identifier News: October 2016 Update

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

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A recently published Thomson Reuters report, entitled ‘How Financial Institutions are Leveraging the Data Commonalities Across Regulations: The Case for a Harmonized Approach to Regulatory Compliance’ revealed that “88 percent of financial institutions will work strategically across regulatory agencies over the next two years”. (As stated by the organization in a related press release.)

“Financial institutions are recognizing the benefits of harmonized approaches to data management, enabling them to leverage data commonalities that exist across multiple global regulations. The major benefit identified by 79 percent of respondents was consistency of data across the business, followed by organizational efficiencies (63 percent), cost savings (50 percent) and a reduction in data sources used (44 percent). These findings underscore a shift in the mindset of leading financial institutions with respect to regulatory data management. (…) With many regulations requiring similar or complementary data sets, organizations are re-evaluating existing regulatory information and workflow arrangements with a view to consolidating current content and developing a more harmonized approach.” Among other findings, the report highlights that “data types seen as offering the biggest return on effort, based on their level of commonality across regulations, were identifiers (such as the Legal Entity Identifier) and classifiers, followed by credit ratings and pricing data.”

To make it easy for stakeholders to follow global developments relevant to Legal Entity Identifier (LEI) rollout, the Global Legal Entity Identifier Foundation (GLEIF) provides related updates via the GLEIF Blog. This blog post summarizes LEI news tracked since August 2016.

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

Canada: All local counterparties that are eligible to obtain an LEI must have an LEI prior to transacting in a reportable derivative

As reported by Mondaq, on 29 September 2016, the “securities regulators of Alberta, British Columbia, New Brunswick, Newfoundland & Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon (the Participating Jurisdictions) published [Canadian Securities Administrators] CSA Multilateral Staff Notice 91-305. This Notice answers specific questions about how certain aspects of the product determination and trade reporting rules (and related companion policies) should be interpreted.” All local counterparties that are eligible to obtain an LEI must have an LEI prior to transacting in a reportable derivative. “If a counterparty is an individual or is not eligible to receive an LEI, the reporting counterparty must identify that party by a single alternative identifier when providing the report to the trade repository. The Participating Jurisdictions have issued relief in the form of Blanket Order 96-501 Relief from Certain Derivatives Reporting Requirements. Unless an exemption is available (…), if a reporting counterparty does not provide an LEI for the other counterparty it will be considered to be in breach of the trade reporting rule. The securities regulators indicate that they will continue to monitor the developments related to the use of LEIs and may consider whether further relief, additional requirements or restrictions on trading are warranted.”

EU: European Central Bank opinion on proposed amendments to the European venture capital funds and the European social entrepreneurship funds regulations – managers of such funds should be required to use the LEI

On 14 July 2016, the European Commission (the Commission) announced its proposed amendments to the European venture capital funds (EuVECA) and the European social entrepreneurship funds (EuSEF) regulations. According to the Commission’s related press release, the “proposal aims to boost investment into venture capital and social projects and make it easier for investors to invest in small and medium-sized innovative companies. In particular, the Commission is proposing to open up the EuVECA and EuSEF fund labels to fund managers of all sizes, and to expand the range of companies that can be invested in. The Commission also aims to make the cross border marketing of EuVECA and EuSEF funds cheaper and easier by explicitly prohibiting fees levied by Member States and simplifying registration processes.”

The Commission added that these reforms are a part of a range of measures it is taking to stimulate venture capital in Europe. They include the use of European Union (EU) budgetary support “to attract capital from major institutional investors through a pan-European venture capital fund of funds, as well as promoting best practices in national tax incentives for venture capital to foster investment in SMEs and start-ups.” These measures would form part of the Capital Markets Union (CMU) Action Plan, which aims to unlock market-based investments by increasing and diversifying funding sources for Europe’s businesses and long-term projects. The proposal is also linked to the Investment Plan for Europe, “which provides a comprehensive strategy to tackle the lack of finance which is holding back Europe's potential to grow and provide jobs for its citizens.”

On 12 September 2016, the European Central Bank (ECB) published its opinion on this legislative proposal. The ECB’s competence to deliver an opinion is based on relevant provisions of the Treaty on the Functioning of the EU, as the proposed Regulation contains provisions affecting the tasks of the European System of Central Banks to implement monetary policy and contribute to the smooth conduct of policies pursued by the competent authorities relating to the stability of the financial system.

In its opinion, the ECB reiterates that it strongly supports the use of internationally agreed standards, such as the International Securities Identification Number (ISIN) and the LEI, “as unique identifiers to meet reporting requirements on the securities markets”. In order to permit the automatic distribution of standardized information on relevant venture capital funds and social entrepreneurship funds to all stakeholders on the capital markets, managers of such funds should be required to use the LEI “as the unique identifier to identify themselves and the qualifying funds they intend to manage” as well as the ISIN for identifying the units or shares of such funds.

With this opinion, the ECB further states that its “proposed mandatory requirement to report the global LEI and the ISIN should apply to all financial markets and not just specific market segments. Such an application will ensure that a minimum set of standardized information covering the main features of all institutions, products and transactions on the financial markets is available to all stakeholders. The ECB is accordingly of the view that, where appropriate and to the extent possible, other legislative changes underpinning the CMU should also establish the mandatory reporting of unique identifiers. This would pave the way for the establishment of automatic data procedures facilitating the distribution of standardized information to all stakeholders on the capital markets.”

The proposal for a Regulation amending Regulation (EU) No 345/2013 on European venture capital funds (EuVECA) and Regulation (EU) No 346/2013 on European social entrepreneurship funds (EuSEF) remains under review of the EU legislator.

EU: European Commission adopts technical standards detailing the reporting of transactions obligations under MiFIR – firms should ensure that they are identified using validated, issued and duly renewed LEIs

As reported by JD Supra Business Advisor on 26 August 2016, the “European Commission adopted a Commission Delegated Regulation in the form of Regulatory Technical Standards [RTS] supplementing the Markets in Financial Instruments Regulation. MiFIR will, from January 3, 2018, require an investment firm to report complete and accurate details of transactions in financial instruments no later than the close of the following business day to its national regulator. One of the purposes of the reporting obligation is for national regulators to undertake market surveillance, including to monitor for market abuse.”

To comply with the reporting obligation, firms will need to identify themselves using their LEI, identify their client using the client’s LEI, identify any individual referred to in the report (using specific formats provided for in the adopted RTS) and will also have to identify any individual or algorithm that made the investment decision. A transaction report must include information about any change in the position of a firm or its client and short sales will need to be flagged. The RTS specify: “In order to ensure certain and efficient identification of investment firms responsible for execution of transactions, those firms should ensure that they are identified in the transaction report submitted pursuant to their transaction reporting obligation using validated, issued and duly renewed” LEIs.

For detailed information on the renewal of LEIs, refer to the GLEIF blog post, entitled ‘Data Quality and Risk Management: The Importance of Timely Renewal of Legal Entity Identifiers’ (see ‘related links’ below).

Ireland: Central Bank of Ireland recommendations for EMIR regulatory returns – a counterparty should ensure that it shares details of its LEI with its trading partners and any reporting delegates

The European Markets Infrastructure Regulation (EMIR) came into force on 16 August 2012 and introduced requirements aimed at improving the transparency of over-the-counter (OTC) derivatives markets and to reduce the risks associated with those markets. On 20 October 2016, Lexology reported that the “Central Bank of Ireland has published an industry letter containing a number of recommendations on how to improve firms’ compliance with EMIR, so as to ensure complete, accurate and timely reporting of derivative trades. All counterparties should consider these recommendations, including in particular those required to make an EMIR Regulatory Return (‘ERR’), and make any necessary amendments to their trade reporting processes and procedures.” (…) The Central Bank’s recommendations address four issues, namely delegated reporting; completeness and accuracy of trade reporting; LEI and Unique Trade Identifier (UTI). “A counterparty should ensure that it shares details of its LEI with its trading partners and any reporting delegates. All reviews of [trade repository] TR data should confirm that the counterparty is correctly identified by its LEI. Counterparties should ensure that LEIs are renewed annually and an entity providing delegated reporting services should monitor its clients’ LEI renewal dates and notify them of those dates in a timely manner.”

Luxembourg: Luxembourg Stock Exchange will accept LEI as the exclusive identifier for issuers from 1 January 2017

As reported by Arendt, on 28 September 2016, the Luxembourg Stock Exchange as operator of the Luxembourg officially appointed mechanism (OAM) announced that from 1 January 2017 it will accept LEI as the exclusive identifiers for issuers. “This announcement was made following the publication of the Commission Delegated Regulation (EU) 2016/1437 of 19 May 2016 supplementing Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, as amended (the ‘Transparency Directive’). The change announced will result in the obligation for all issuers with Luxembourg as their home Member State within the meaning of Article 2(1)(i) of the Transparency Directive to obtain an LEI by the end of this year. (…) Issuers incorporated outside of Luxembourg but having elected Luxembourg as their home Member State within the meaning of Article 2(1)(i) of the Transparency Directive are advised to enquire in the jurisdiction of incorporation about the practicalities of obtaining an LEI.”

U.S.: Investment company reporting modernization embraces the use of LEI

On 13 October 2016, Mondovisione published a statement by Kara M. Stein, Commissioner of the United States (U.S.) Securities and Exchange Commission (SEC or the Commission) relevant to investment company reporting modernization. Commissioner Stein comments: “Over the last two decades, funds have become central to the financial plans of millions of Americans. Individuals entrust their savings to these investment funds as they prepare for retirement, college tuition payments, home purchases and other important financial goals. The new data we are requesting will allow the Commission to better monitor the growth, trends, patterns, and activities of these funds. It will also help to put more useful information into the hands of investors as they make important investment decisions.”

“First, the new forms we are adopting today will modernize how funds report portfolio and census information to both the Commission and the public. Second, today’s rule will require additional and more frequent reporting to the Commission. In particular, it will require funds to provide critical new information about derivatives, [exchange traded funds] ETFs, and risk measures. With markets that are faster and more complex than ever before, these changes represent an important step toward improved evaluation and monitoring. It should allow the Commission to more closely follow emerging trends and risks – all for the benefit of investors.”

“Perhaps one of the most important elements of today’s rule is how we ask registered funds to provide the reporting. Funds will submit the new forms in a structured, XML format. This means that, while the information can be read by a person, it can also be easily processed by computers for analysis. Today’s rule also embraces the use of the legal entity identifier, or LEI. The LEI is a way to uniquely identify financial market participants across reports and across markets. With thousands of registered funds and trillions of dollars in assets, LEI will help enhance both fund identification and analysis. Wider use of structured data and LEIs will enable market participants, the Commission, and other regulators to make the most of limited resources and better understand the data being reported. For these reasons, I am happy to support the adoption of modernized and enhanced reporting.”

IMF and FSB publish first progress report with regard to the second phase of the G20 Data Gaps Initiative: Expansion of LEI coverage will be key to ensure that all benefits related to the availability of a universal identifier may be achieved

The first progress report, prepared by the staff of the International Monetary Fund (IMF) and the Financial Stability Board (FSB) Secretariat, with regard to the second phase of the Group of 20 (G20) Data Gaps Initiative (DGI-2) was published in September 2016.

As stated in the report, the “main objective of DGI-2 is to implement the regular collection and dissemination of reliable and timely statistics for policy use. Its twenty recommendations are clustered under three main headings: (1) monitoring risk in the financial sector, (2) vulnerabilities, interconnections and spillovers, and (3) data sharing and communication of official statistics. The DGI-2 maintains the continuity with the DGI-1 recommendations while setting more specific objectives with the intention for the G20 economies to compile and disseminate minimum common datasets for these recommendations. The DGI-2 also includes new recommendations to reflect the evolving users’ needs. Furthermore, the DGI-2 aims at strengthening the synergies with other relevant global initiatives.”

Among other things, the report finds that the work on the LEI “could also contribute to the consistency and quality of several datasets covered by the DGI-2 framework. A further expansion of the LEI coverage will be key to ensure that all the benefits related to the availability of a universal identifier may be achieved.”

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