Under MiFID II, entities involved in European trades will be required to supply Legal Entity Identifiers (LEIs) in their trade reporting for all asset classes. Ron Jordan, Managing Director of Data Services at The Depository Trust & Clearing Corporation (DTCC), discusses current LEI uptake and obstacles to adoption, and the impending impact of regulatory change.
The global Legal Entity Identifier (LEI) system is managed by the Global Legal Entity Identifier Foundation (GLEIF), which serves as its operating arm. Beneath the GLEIF are about 30 LEI operating units (LOUs), which issue the LEIs, validate the information, and maintain the LEIs on behalf of the registrants, those in the industry, or those in the financial services world that are required to get LEIs for regulatory reporting.
Approximately 500,000 LEIs have been issued over the last few years to financial institutions and corporates across the globe, in over 200 jurisdictions. The GMEI utility, which is a DTCC wholly-owned subsidiary, is an accredited LOU, and has issued approximately 240,000 of those 500,000 global LEIs, in these 200 jurisdictions.
To register a corporate entity to get an LEI, the one-time registration fee is generally between $150 and $200. There is an annual renewal requirement, and the renewal fee is generally between $75 and $100 per year, for each LEI. Competition in the industry helps keep these costs down. LOUs take the information, assign unique LEI codes to the data, and validate the information to make sure it can be validated against publicly available sources, such as business registries.
On May 1st 2017, the LEI system underwent a fairly fundamental change. Rather than just requiring LEIs to be registered for core baseline information, beginning May 1st, LOUs began collecting “Level 2” information from LEI registrants on their direct and ultimate parents. This requirement is mandatory for all LEI registrants and anybody renewing an LEI.
LEIs help reduce systemic risk, but must be renewed to maintain the system
The use of LEIs, generally speaking, is to help regulators understand systemic risk, and risk of counterparties. So by having LEIs reported, they can uniquely and unambiguously identify parties to transactions regardless of the broker dealer, or entity that may be reporting to the regulator.
If a firm trades with three different broker dealers, this firm will be reported with the same LEI, regardless who is reporting, which helps regulators better understand systemic risk, or whether there is any concentration risk for any entity.
That is also the reason behind the reporting of direct and ultimate parent—Level 2 information—so that regulators can get an understanding not only of which entity is conducting a trade, but who that entity’s ultimate parent or direct parent may be. When other entities, or other ‘children’ of parent companies are transacting, LEIs help the regulators to better aggregate the risk linked to the parent.
One of the major obstacles to wider adoption is that unless LEIs are required, registrants are often reluctant to get them. LEIs are required today for certain regulatory reporting only—in the OTC derivatives markets specifically, by the CTFC in the United States, ESMA in Europe, and certain other regulatory bodies around the globe, which have mandated LEIs for trade reporting. But a lack of uniform requirement of LEIs prevails amongst global jurisdictions.
The other ongoing challenge is ensuring that entities renew their LEIs on an annual basis. The renewal is important because it helps keep the system operational. If a registrant obtains an LEI and fails to renew it, the LEI, while still valid under the existing regulatory framework, moves into a lapsed status, indicating that the registrant has not returned to renew its LEI. Timely renewal of LEIs is important as it ensures accuracy of reference data, maximizing the value of this information to its users – the financial industry. But without regulatory enforcement of the annual renewal, the system funding can be challenged. Makings sure that the operating model can survive should be seen as an important regulatory objective.
Without a regulatory enforcement of the annual renewal, the system funding can be challenged. Making sure that the operating model can survive should be seen as an important regulatory objective.
MiFID II to drive a surge in adoption
Starting January 3rd 2018, for the first time, firms subject to MiFID II will require LEIs to report transactions across all asset classes, not just derivatives. Any trades being reported to a European regulator—be it equities, fixed income etc.—will have to be reported with an LEI identifying the party and counterparty. This is a significant expansion of the use of LEIs for reporting purposes.
Leading up to January, there will likely be a dramatic increase in the number of registrants for LEIs. This additional volume will need to be handled on a timely basis by the LEI operating units, like DTCC GMEI Utility, as well as all of the others.
When the LEI framework was introduced as an integral part of derivatives reporting beginning 2012, the industry experienced a very large concentration of registrations just prior to LEI rules going into effect. We expect that to happen again as we approach January 2018—in fact, estimates range from a 50% to a 500% increase in the velocity of LEI registrants in lead up to MiFID II implementation.
All of the LOUs are currently preparing for that surge. DTCC is determining how best to increase staffing to be able to accommodate the registrations and turn them around in a timely manner. We are considering ways to try to incentivize registrants who may need an LEI for MiFID II reporting to obtain them in advance of December 2017, rather than wait until the last minute. We are also working closely with the GLEIF to determine the best way to raise awareness, making sure that the firms that will be affected by MiFID II requirements understand the need for LEIs as soon as possible.
