What is LEI code and how does it work?
What is a Legal Entity Identifier?
LEI is the abbreviated term for Legal Entity Identifiers, a unique alphanumeric 20-code associated with a single legal entity in accordance with the ISO 17442 standard. Put simply, it is a reference data tool to standardize how a counterparty is identified on financial transactions, particularly for those overseas. The goal of an LEI code is to help regulate financial transactions of legal entities and is used by the Financial Conduct Authority (FCA) to monitor and measure the systemic risk and support more cost-effective compliance with regulatory reporting requirements. This helps to prevent fraud and potential illegal foul play. LEI‘s became mandatory as of the 3rd of January in 2018 for trading entities. The European Union revised Markets in Finance Instruments Directive (MiFID II) and accompanying regulation (MiFIR) both came into effect on this date, affecting trading venues, investment firms, and their intermediaries.
Who requires an LEI?
An LEI can be requested for all parties in a financial transaction, including funds/trusts, non-profit and charity organizations, Government bodies and organizations, Registered Companies including Registered Subsidiaries, Sole Proprietors (Individuals must appear in their local register) and Branch offices (the main HQ entity must already have a LEI.)
Individuals or operating divisions should not request an LEI, these entities should utilize one of their parent organizations. It is important companies check if an LEI is needed as for some the LEI is not voluntary but mandatory by local, national or international regulations. It’s important to research this to ensure you are abiding by the correct laws. Your organization may not legally require an LEI at present if you aren’t a trading entity, but discussions are already being helped by governing bodies to determine the potential uses of an LEI for other transactions companies make. With online authentication being one of the most vital aspects of digital transactions, the future may see LEI’s being used for other types of secure transactions or goods.
How does it work?
Each LEI is a unique number for that entity and contains specific reference information that ensures quick identification. As an international standard (based on (ISO 17442) all LEI information is openly published and accessible to all. Whereby business registration standards vary all around the world, the LEI format never changes, allowing for seamless overseas transactions. The process to acquire an LEI is simple, companies simply contact an LEI issuing organization, providing the necessary information and pay the appropriate fees. The issuing organization then cross-references this information against an authoritative source (such as a business register) and if all is okayed, you will get your Legal Entity Identifier number, allowing you to make your required financial transactions. The minimum amount of data which is necessary to confirm an LEI includes the official name of the legal entity, the registered address of the legal entity, the country of formation, the codes for the representation of names of countries and their subdivisions, the date of the first LEI assignment, the date of last update of the LEI information and the expiry date (if applicable.) The LEI, while made up of 20 characters, can be broken down to the parts – the first four characters identify the issuing organization, 5-18 the company and the last two are check digits.
It’s important to look into LEI’s and check whether your company needs one. Remember, if in doubt – check. There are countless resources where you can find advice and information.