The deficient data on financial transactions, as well as the risks and interlacing of financial institutions that became apparent during the financial crisis demonstrate the need for international regulation.
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 new system also provides greater transparency to investors and leads to lower operating costs and higher market efficiency.
The LEI – a public asset
The LEI will be 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 will become a binding standard for regulatory reporting. Furthermore, the existing identifiers (like in the Netherlands the registration number in the Business Register of the Chamber of Commerce) are to be mapped on the LEI.
The LEI, developed by the FSB, will be a random 20 character alphanumeric code as per ISO standard 17442. Additionally, further company data such as the company name, the domicile and the date of first participation in the LEI system will be recorded.
Until the LEI system is fully established, pre-Local Operating Units (pre-LOU) will be responsible for allocating pre-LEIs.
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 introduction and operation of the LEI system in the Netherlands will also come 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 will ensure that these institutions use the LEI system.