Legal entities that conduct financial transactions are uniquely identified by their 20-character alphanumeric Legal Entity Identifier (LEI). The LEI is structured in accordance with ISO 17442, the international standard developed by the International Organisation for Standardisation (ISO). The LEI seeks to improve transparency and reduce risk in the global financial system by providing a uniform and widely accepted means of identifying parties to financial transactions.
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What Situations Call for an LEI?
Legal entities are required to obtain an LEI when engaging in financial transactions that fall under specific regulatory reporting requirements, such as derivatives or certain securities transactions. Organisations that take part in financial transactions as counterparties or intermediaries are likewise covered. In regulated financial environments, identity verification tools such as the Medallion Guarantee Stamp are often required alongside LEIs.
How to get an LEI
Local Operating Units (LOUs) have been authorised by the Global Legal Entity Identifier Foundation (GLEIF) to issue LEIs. To obtain an LEI, an entity must complete an application and provide the required information about the entity. The LOU validates the entity’s reference data and, once verified, issues the LEI.
Benefits of an LEI
There are several benefits of having an LEI. Here, we examine the main advantages:
- Greater transparency – LEIs help clearly identify counterparties and reduce the risk of hidden ownership structures or confusion between entities.
- Reduced risk – LEIs can help reduce risk by providing a more complete and accurate image of counterparties.
- Enhanced automation – Using LEIs to automate financial transactions can save time and money.
- Compliance – Because many regulatory frameworks require an LEI, obtaining one is essential for businesses that participate in reportable financial transactions.
What lies next for the LEI?
The LEI was introduced following the 2008 financial crisis, but it has been adopted by many financial institutions and authorities worldwide. In the global financial system, the LEI is expected to take on a more prominent role.
In conclusion
The LEI can reduce risk and increase transparency for the global financial system. Although it is a relatively recent standard, it has been widely adopted by authorities and financial institutions worldwide. In the coming years, it is expected that the LEI will gain greater worldwide significance.