After the financial crisis, the Legal Entity Identifiers (LEIs) initiative was introduced by the G20 and the Financial Stability Board (FSB) to help increase transparency in the derivatives market. The LEI, ISO 17442, is a unique reference number for companies involved in financial transactions, which links to information on their ownership and function. Today, LEIs are used globally as reference data, enabling firms to manage risk and market abuse, while improving the accuracy of financial data.
The use of LEIs has boomed since their development in 2011. According to the Global Legal Entity Identifier Foundation (GLEIF), a not-for-profit organization tasked with managing the LEI system, there are now 1.4 million active LEIs spread across 222 jurisdictions.
One of the key drivers behind the success of LEIs is their adoption by regulators worldwide. Today, LEIs are required in the regulations of no fewer than 15 jurisdictions.
In Europe, the Markets in Financial Instruments Directive (MiFID II) is the key regulatory driver, mandating the use of LEIs in all trades made in the bloc. But MiFID II is just the tip of the iceberg.
From 2019 and beyond, a greater number of regulations around the world will include the use of LEIs. In the US, for example, the Office of Financial Research will require the use of a valid LEI for identifying parties to repurchasing agreement transactions cleared through a central clearing counterparty, and is expected to start collecting data from mid-October. In India, meanwhile, LEIs will be required for participation in non-derivatives markets from around March 2020. These are just two examples. New regulations incorporating LEIs are also planned for the UK, the EU, Australia, Singapore, Hong Kong, Korea, Canada and Russia.
The boom in LEI data, while welcome for use cases such as market surveillance, also represents a major data management challenge for firms. One such challenge includes mapping ISINs (International Securities Identification Number) to LEIs to ensure accurate, straight-through trading; a process that firms have traditionally found expensive and resource-heavy. Incorrect mapping can lead to failed trades or inconsistent regulatory reporting, both of which have serious monetary and reputational repercussions.
GLEIF, in partnership with the Association of National Numbering Agencies (ANNA), is trying to address ISIN-LEI mapping through the first daily open-source relationship file that links the two codes. To date, however, just 11 of the 116 National Numbering Agencies responsible for issuing ISINs have signed up to the initiative.
As LEIs proliferate and become used more widely, it will be critical for firms to access consolidated and quality-assured ISIN and LEI codes from a trusted source, especially while the market waits for issuers to sign up to the GLEIF/ANNA mapping file. Doing so will not only help ensure compliance, but will also enhance the quality of data analysis and therefore trading decisions. Here, finding the right reference data partner makes all the difference.
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