Background information on LEIs
- 10 May 2023
- Edited 15 May 2023
- 1 min
- Managing and growing
During the financial crisis, it became apparent that data on financial transactions was deficient and incomplete, and that financial institutions were taking risks and closely interlacing. This demonstrated the need for international regulation.
Greater transparency required
For this reason, the G-20, a group representing the world’s major industrialised countries and emerging economies, committed to reducing systemic risk in financial markets and improving the transparency of OTC derivative markets. This has resulted in legislative initiatives, of which Dodd-Franck (Title VII) and the European Market Infrastructure Regulation (EMIR) are the most prominent examples.
In the interest of further improving the quality of financial data as well as reducing market abuse and financial fraud, it has been decided to clearly identify all counterparties through a compulsory uniform reference code.
Advantages of a Legal Entity Identifier (LEI) System
Beside better risk assessment and more efficient analysis, the LEI system also provides greater transparency to investors and leads to lower operating costs and higher market efficiency.
The LEI – a public asset
The LEI is a public asset without private property or licensee rights. As a result of new European regulations, the LEI will also be used vis-à-vis the supervisory bodies in the future.
The LEI is not intended to substitute existing identifiers but serves as a binding standard for regulatory reporting. Furthermore, the identifiers existing before the introduction of the LEI system (for instance the Netherlands Chamber of Commerce KVK number) are mapped on the LEI.
The LEI was developed by the FSB. It consists of a random 20 character alphanumeric code as per ISO standard 17442. Other company data, such as the company name, the (head office's) business address, and the date of first participation in the LEI system are recorded.
LEI in the Netherlands
The Netherlands Authority for the Financial Markets (AFM) is the national body responsible for ensuring compliance by the financial markets and, consequently, also with the European Market Infrastructure Regulation (EMIR). The operation of the LEI system in the Netherlands also falls under the responsibility of the AFM.
The importance of a LEI system is also underscored by the Dutch Central Bank (de Nederlandsche Bank, DNB). DNB is responsible for supervising over-the-counter (OTC) derivatives under the EMIR for, in particular, banks, pension funds and insurers, and ensures that these institutions use the LEI system.