Legal Identity Identifier Code
For any legal entity (company, organization, firm, agency) dealing in financial transactions, having an LEI code is compulsory. It is an identification code applicable to these entities under ISO 17442. It enables accurate and consistent identification of the mentioned legal entities. To elaborate further, any legal entity, whose mode of business incorporates financial transactions, which also includes bodies that are financially or legally accountable for performing financial transactions, which also possess the legal authority in their power to independently enter into legal contracts irrespective of their incorporation or them being constituted with them in some other manner. It includes governmental and supra-national organizations but doesn’t include individual people (free entities).
It is with this code that a legal party is enabled to a financial transaction and for that transaction to be identified precisely. Let’s have a look at the structure of an LEI registration code and what purpose it serves.
Structure of Legal Identity Identifier Code:
Basically, an LEI code is a 20-digit alphanumeric code. The structure of an LEI code is designed in accordance with the ISO standard 17442. That 20-digit code is divide into 4 part, each serving a purpose. Consider the example stated below.
1 2 3 4, 5 6, 7 8 9 10 11 12 13 14 15 16 17 18, 19 20.
- The first four numbers (1-4) represent the LOU (Local Operating Unit) ID which has issued the LEI to that legal entity.
- The next two numbers (5,6) always have a value of zero. They are also called reserved numbers.
- The next 12 numbers (7-18) are the identity identifiers.
- The last two number (19, 20) are for verification purpose, called the verification ID.
With the use of LEI codes, every deal that is conducted in the market will connect to the other correspondent via an LEI code. speaking in simpler terms it is used to oversee the financial market abiding by regulations, hence, it makes the process for regulators to oversee these transactions and ensure fair-play. It is the connecting link between the companies, the financial market, and the regulators overseeing the entire process.
Issuance of LEI code:
An LEI code can only be issued by an accredited LOU (Locally Operated Unit) operating under the supervision and authority of GLEIF (Global Legal Identity Identifier Foundation). An LEI code is what enables a trade to be conducted under the supervision of regulating authorities, without which, financial trade between two legal entities isn’t possible. In simple terms, no LEI, no trade.
About GLEIF:
GLEIF (Global Legal Identity Identifier Foundation) is a foundation which governs and control the issuance of LEI codes on a global basis. Although the organization is responsible for issuing the LEIs, it doesn’t do it itself. Instead, there are a number of private and public companies in the network of GLEIF acting as its LOUs (Locally Operated Units) that are responsible for supplying LEI registrations and renewing the LEI codes. For organizations that wish to obtain an LEI code, these LOUs at as a gateway.
Code Renewal:
An LEI code needs to be renewed on an annual basis. Which means that an LEI issue January 2019 has expired on January 2019. In other words, after a year, a legal entity needs to have their LEI renewed if they wish to continue trading or conducting business. An expired LEI needs to be renewed if the entity wishes to have their business continued. This practice has been put in place to ensure that the Global LEI pool data remains up-to-date. For the purpose of feasibility, GLEIF offers multi-year renewal. Which means that a legal entity can have their LEI extended for a period of 3 or 5 years. If that is the case, the LEI register will check the data of that entity on a yearly basis and keep updating their pool and renewing the LEI code.
Importance of LEI:
LEI enables a unique and clear identification of both legal entities partaking in a financial transaction, which increases transparency. Every LEI code contains reference data which is structured in a unique manner and is classified into two levels.
First level: The identification level. It helps in the identification of the identity of the parties involved in the transaction. It contains information such as entity registration details which includes the legal name of identities, their numbers of registration, the legal address of entities and their HQs.
Second Level: Recognition level. This level tells us about who among the involved parties in the transaction owns whom. It contains information regarding the ownership structure of an entity which answers the question of who owns whom.
The main purpose of an LEI code is to ensure transparency in financial transactions and data system. The system of issuing an LEI code was introduced as a reaction to the financial crisis. Financial regulators worldwide were faced with conducting risk analysis on a systematic basis to understand the cumulative risks of financially involved in asset classes and markets for the involved entities and their counterparties. An accurate and precise system for identification of legal entities involved in financial transactions was needed on urgent basis for the regulators and financial institutions alike. A standardized Legal Entity Identifier and a system to support it was the requirement of the time. Hence, ISO standard 17442 was created and made publically available in May 2012. GLEIF was put in place to issue LEIs to legal financial entities and have the whole system standardized on a global basis.
The FSB (Financial Stability Board) formed the structure of a global LEI system with recommendations from regulatory bodies and industry participants. A three-tier system was introduced which managed the registration, validation, and maintenance of the global LEI records.
- ROC (Regulatory Oversight Committee).
- COU (Central Operating Unit).
- LOU (Local Operating Units).
The European Union and the USA were the first to adopt the LEI system for transparent financial reporting. The adoption is still underway, with many countries worldwide adopting to the system, with the concentration remaining centred to USA, European Union, and Canada.
View our Legal Entity Identifier Register page for more details, you can also register online here.