2015 has been a year of genuine progress for the Legal Entity Identifier (LEI) project. It is fair to say that it would not have been particularly difficult this time last year to find sceptics about whether such a statement could be made at this point. ESMA have been a key driver behind this progress. The year began with an EMIR Q&A suggesting that EU trade reporting would require an LEI and it ends with the final draft regulatory technical standards (RTS) for MiFID II mandating the LEI in EU transaction reporting.
These moves from ESMA have been part of the reason that LEI issuances have seen significant growth in 2015. A total of 412,454 LEIs have now been issued globally. This clearly leaves a large number of entities still requiring an LEI before it achieves the goal set by the G20 to be able to unambiguously identify all entities engaged in financial transactions, however what it does represent is significant progress. If more regulators follow ESMA’s lead in mandating the LEI, then 2016 could see even greater growth in the number of issuances.
One sign that the LEI has been such a hot topic this year is that we have regularly been reporting on its progress. In July we wrote about the challenges of creating and initiating Level 2 LEI data, concluding that the Level 1 data issues need to be resolved before the Level 2 process is pushed forward. We followed this up in September by reporting on a crucial Consultation Paper from the Legal Entity Identifier Regulatory Oversight Committee (LEIROC) which seemed to indicated that the plan for the LEI may not be as ambitious as it could be.
Ultimately, last month we reported positive news from the LEIROC’s progress report, with the big news being The Global Legal Entity Identifier Foundation (GLEIF) has now been delegated as the overseer of the technical and operational standards of the LEI project.
The LEI has not been without its detractors despite 2015 witnessing such progress. ESMA’s announcement that the LEI would be mandated under MiFID II was met with concern from some quarters, with a key concern being the high price of a yearly subscription, particularly given that a firm will need an identifier for each entity within its group. Many firms also foresaw serious difficulty in persuading all of their customers to register for an LEI in order to be able to enter into transactions under MiFID II.
Another potential issue is that due to the fact that an LEI is unique to each entity there are some questions around how incentivised these entities will be to renew their subscriptions. Technically a firm will need to pay the yearly fee in order to maintain their LEI, but in practice if a firm was to let their LEI lapse it would still identify them.
If allowing LEIs to lapse did become anything like common practice the usefulness of the system would become questionable. The goal of the system is to give regulators the ability to evaluate systemic and emerging risk, to identify trends, and to take corrective steps, if it were plagued by expired and unverified data this goal would be compromised.
Ultimately whether or not this will happen will come down to whether or not transaction reporting firms are willing to use LEIs that are expired and subsequently risk reporting the old and potentially incorrect data, and in turn this will ultimately be determined by the regulatory response to such practices and the potential for such practices.
2015 has undoubtedly seen the LEI system take substantial strides in the right direction, but the question of LEI renewals being taken seriously by firms and regulators needs answering sooner rather than later and the success of the whole system potentially rests on the answer.