More than 420,000 legal entity identifiers, (LEIs), have been issued worldwide, promising to foster greater transparency across markets, identify counterparty exposures, and significantly improve the analysis of systemic risk. But the true value of a global LEI system will be realised when regulatory reporting covering all asset classes in every jurisdiction is required to incorporate LEIs to identify trading parties.
The Global Legal Entity Identifier System (GLEIS) includes more than 25 Local Operating Units (LOUs) and is now an established means of providing freely available legal entity identifier (LEI) codes and entity reference data for use by both regulators and market participants to foster greater transparency across markets and identify counterparty exposures and significantly improve the analysis of systemic risk. In particular, the System is playing the critical global role in organising the registration and ongoing renewal of LEIs, ensuring the reference data associated with them is of the highest quality.
Only with a regulatory mandate across all asset classes can regulators and the industry ensure that there are no gaps through which financial exposure can fall. The U.S. and Europe were the first jurisdictions to incorporate the use of LEIs for derivatives recordkeeping and reporting. Since then, that list has expanded to include Australia, Canada, Hong Kong and Singapore.
Increasing the use of LEIs across asset classes is underway. The Securities and Exchange Commission (SEC) has added an LEI mandate to its proposed rule on investment company reporting modernisation. If the rule is finalised in its current form, funds registered with the SEC will need to identify themselves and various classes of counterparties with LEIs. The SEC has also finalised the use of LEIs for recordkeeping and reporting of security-based swaps.
In Europe, even broader LEI mandates are appearing: Markets in Financial Instruments Directive/Regulation (MiFID/R), European Market Infrastructure Regulation (EMIR), Securities Finance Transactions Regulation (SFTR) and Central Securities Depositories Regulation (CSDR) all require the use of LEIs in their reporting architecture.
A significant step toward fostering widespread use of LEI information was the creation of a common data file format by the Global Legal Entity Identifier Foundation (GLEIF) and its required adoption by all LOUs. The common data file format serves to normalise the LEI information provided by all of the LOUs and enables the GLEIF to consolidate each into a single golden copy, which it makes available daily. This represents a vital piece of the puzzle for LEI adoption that enables easy access and cost-effective use of LEIs by market participants, data vendors and regulators.
Building on the continued adoption by regulators and the operating infrastructure being spearheaded by the GLEIF, the next wave of data within the global LEI system will be the expansion into relationship information, most notably the ultimate parents of LEIs. Ultimate parent information would be a large step forward in helping regulators and financial firms understand financial exposures, and its inclusion into the global LEI system is currently being studied carefully so that it can be incorporated in a consistent manner that keeps the costs of the overall system low.
The global LEI system is well on its way to becoming the corner stone of systemic risk management. To realise its full potential, regulators need to continue to mandate the use of LEIs; the GLEIF needs to continue to stress data quality and expand the system in a logical, cost-effective manner; and the LOUs need to continue to embrace their role as the link between the global LEI system and the millions of global entities that need to register and maintain their LEIs.