Guest Post by Darragh Hayes, Director at LEI Worldwide, 28.07.2020
If you are involved in conducting financial transactions in the European Union you will likely have heard of the Legal Entity Identifier. Legal Entity Identifiers are needed by firms to fulfil their many reporting obligations under a host of recently introduced regulations such as MiFID II, EMiR/EMiR Refit and the upcoming SFTR and CSDR regulations.
Since the Global Financial Crisis in 2008 European regulators such as ESMA have been re-examining the regulatory frameworks which determine the way financial markets are operated.
The main issue was with transparency in the markets causing difficulty when identifying counterparties in transactions. When the stock market crashed, thousands of financial instruments were unidentifiable which caused mass confusion. The lack of transparency ultimately put financial institutions and banks in a vulnerable position.
Europe now has one of the most advanced regulatory frameworks in the world. It is home to some of the worlds largest securities markets, fund administration centres such as Ireland and Luxembourg and also the largest Central Securities Depositories.
The aim of these regulations is to reduce systemic risk and bring increased transparency to the financial markets. Initially recommended by the Financial Stability Board, and endorsed by the G20 the global LEI system has been rolled out across Europe in a major way since the introduction of MiFID 2 and EMiR in 2018.
With 1.7 Million LEIs now in existence, it is likely that many more European companies will require an LEI and it is widely predicted that as many as 20 million LEIs will be registered within the next number of years.
LEI codes are required for European legal entities that fall under the following classifications and regulations:
- Trade or issue derivatives/securities
- Issue equity, debt
- All entities listed on an exchange
- Trade equity or debt
- Under supervision by a financial regulator and their affiliates, subsidiaries and holding companies
- Trading with an EU-licensed broker
- Fall under the categories of Mifid II, Emir, SFTR, CSDR
European Markets Infrastructure Regulation (EMIR)
EMIR is an EU regulation governing legislation for Over-the-counter (OTC) derivatives. The regulation requires market participants to adhere to standardized reporting obligations with regards to derivative contracts. These rules mainly apply to central counterparties and Trade Repositories. EMIR has mandated that trade repositories include a Legal Entity Identifier in trade reports since November 2017.
Markets in Financial Instruments Directive 2 (MiFID II)
MiFID is 2007 EU regulation that provides legislation governing legal entities who provide financial services. MiFID II is the revised edition which came into force in January 3rd 2018. MiFID also requires that financial service providers utilize the LEI Code when submitting regulatory reports.
Securities Financing Transactions Regulation (SFTR)
Securities Financing Transactions Regulation (SFTR) was introduced in 2016 in an effort to enhance the transparency and processes for issuers and buyers in the European securities markets.
Trade counterparties and collateral issuers need a Legal Entity Identifier under SFTR. The original deadline for investment firms and creditors to report an LEI in Europe was April 1st 2020, but this has been extended to July 13th due to COVID-19 delays.
“The correct reporting of valid LEIs is a requirement for the compliance of an SFT report with the reporting obligation under SFTR. The correctness and completeness of an SFT report is verified by a registered or recognised TR.”
– ESMA
The Central Securities Depositories Regulation (CSDR)
The Central Securities Depositories Regulation (CSDR) was first introduced in September 2014. CSDR is a regulation concerned with CSDs (Central Securities Depositories) and securities settlements. CSDs are heavily regulated as they provide the platforms which enable securities transaction take place.
CSDR also will require CSDs to report an LEI as of July 13th 2020. CSDs issue reports on securities transaction data to their regulators on a quarterly basis and are required to include LEIs in the reporting process. Failure to report an LEI will result in the blocking of the transaction and a “no LEI, no trade” ruling will be implemented.
Other EU regulations requiring an LEI are Markets Abuse Regulation (MAR), the Capital Requirements Regulations, the Transparency Directive, Alternate Investment Finds Directive and the prospectus regulation.
These regulatory requirements mean hundreds of thousands of entities across Europe are obligated to apply for an LEI code. If you are engaging in financial transactions, or on behalf of your customers and have not yet obtained an LEI it is advised to do so before July 13th 2020 ahead of SFTR. ESMA has estimated that as much as 10% of EU issuers are yet to put LEIs in place, and it is looking likely that a few will have impacted future security issuances.
Will UK entities that fall under EU regulation be obliged to report an LEI in the case of a no-deal Brexit?
The UK has the second-highest number of registered LEI Codes globally after the United States. There are over 155,000 LEIs registered in Great Britain already.
UK firms are familiar with the LEI by now, as it is the second-largest user of the LEI after the US, and also will be familiar with previous European regulations.
It is still difficult to say, but in the case that a no-deal Brexit goes through and UK entities are not reporting an LEI, it may need to be re-examined by a UK authority or joint EU/UK collaboration.
The EU will still retain a strong influence over UK firms trading within the EU.
Most UK firms recognise that they would still comply with SFTR and EU regulations as they would want to show that they still wish to trade cross-boarders and not minimise their potential customer base.
How can I Obtain a Legal Entity Identifier?
If your company trades in stocks, forex, bonds or issues credit and loans within the EU you should apply for a Legal Entity Identifier.
The application process can be done by any member of the applying entity with access to basic company information such as registration documents.
Once the registration form has been submitted it will be reviewed and cross-checked with the data on the companies registry. The LEI will then be issued and uploaded to the global LEI index within 24 hours.
Once listed on the global LEI index an LEI number remains permanent, however, it must be maintained and renewed annually. This is to ensure that all LEI data is relevant, up to date and reliable for the regulators.
For more information on how to obtain a Legal Entity Identifier please don’t hesitate to Contact Us. The experts at Euro Company Formations would be happy to assist you to apply for an LEI code.
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