What is an LEI?
The 2008 financial crisis resulted in a number of regulatory initiatives in the EU, the US and elsewhere with a focus on the identification of counterparties to certain financial transactions.
A Legal Entity Identifier ("LEI") is a 20-digit alphanumeric code, which uniquely identifies each legal entity that engages in a financial transaction, regardless of their jurisdiction. The initiative to establish a Global LEI System ("GLEIS") was taken by the G20 with the express purpose of improving transparency and risk assessment in the global financial markets and the GLEIS has been introduced and adopted by regulators globally. Current regimes requiring or requesting disclosure of LEI codes include the European Market Infrastructure Regulation ("EMIR") (as applied to swaps with participants in the EU and US), Solvency II, the Alternative Investment Fund Managers Directive ("AIFMD"), the Market Abuse Regulation ("MAR") and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act").
LEI codes are issued by LEI issuing Local Operating Units ("LOUs") accredited by the Global Legal Entity Identifier Foundation, which is responsible for monitoring LEI data quality. Only an eligible entity or its authorised representative may obtain an LEI code. It is worth noting that there are currently only a limited number of LOUs which are authorised to issue LEIs to Cayman Islands entities – including the Irish Stock Exchange ("ISE"), the London Stock Exchange and Bloomberg – and that these issuers have experienced a significant surge in applications in recent months such that turnaround times have increased and may reasonably be expected to continue to do so in the lead up to 3 January 2018. Therefore it will be of benefit to commence the application process as early as possible, where required.
LEIs are valid for one year and must be updated by way of annual re-application to the relevant LEI issuance agency. Lapsed LEIs will not be deemed valid for the Markets in Financial Instruments Regulation ("MiFIR") reporting.
Why the increased demand for LEIs?
Many regulations, including the Dodd-Frank Act, EMIR and AIFMD already mandate the use of LEIs. However, more recently MAR, MiFIR and the Markets in Financial Instruments Directive ("MiFID II") have similarly introduced requirements for a number of various entities to be identified through an LEI. Therefore the requirement to obtain an LEI is being extended to a significant number of additional legal entities.
While MAR came into force in July 2016, MiFID II and MiFIR will be implemented on 3 January 2018. They will provide that all firms subject to MiFID II transaction reporting obligations, including EU investment firms, portfolio management companies providing investment advice and portfolio management on a client-by-client basis (e.g. managed accounts), legal entities and EU branches of third country investment firms will only be able to trade on behalf of relevant clients which hold valid LEIs.
In reporting any relevant transaction, MiFIR introduces requirements for a number of various entities to be identified through an LEI, including:
- Investment firms that execute transactions in financial instruments;
- The clients (e.g. buyer, seller) on whose behalf the investment firm executes transactions, when the client is a legal entity;
- The client of the firm on whose behalf the trading venue is reporting under MiFIR, when the client is a legal entity;
- The person who makes the decision to acquire the financial instrument, when the person is a legal entity (e.g. investment managers acting under a discretionary mandate on behalf of its underlying clients);
- The firm transmitting the order;
- The entity submitting a transaction report (e.g. trading venue, ARM, investment firm); and
- The issuer of any financial instrument listed and/or traded on a trading venue.
We understand that, following a recent release from the ISE, its current position as a market operator under MiFID II and MAR will be to obtain the LEI of issuers with securities listed on the ISE. The ISE has stated, as a result of MAR and the forthcoming implementation of MiFID II, that any issuer seeking to list securities on the ISE from 6 November 2017 must provide an LEI as part of its application.