The European Securities and Markets Authority (“ESMA”) has granted investment firms a six-month reprieve from the Legal Entity Identifier (“LEI”) requirements set out under MiFID II.
As set out in our previous briefing (here), the LEI is a 20-character, alpha-numeric code that enables clear and unique identification of an entity that is issued with an LEI participating in financial transactions.
The Markets in Financial Instrument Regulation 600/2014 (“MiFIR”) requires various entities to be identified through the LEI, meaning that both investment firms and trading venues must obtain their clients’/issuers LEIs in certain circumstances.
Specifically, an investment firm must obtain an LEI from clients that are legal persons prior to providing a service that would result in a transaction reporting obligation and is prohibited from providing any service triggering an obligation to submit such a report unless it has received the LEI. Moreover, each trading venue must identify each issuer of a financial instrument traded on their systems with an LEI code when making daily data submissions to the Financial Instruments Reference data systems (“FIRDS”). These obligations apply regardless of where the clients or issuers are based and regardless of whether they are subject to LEI requirements in their own jurisdiction.
Six Month Delay
On 20 December 2017, ESMA issued a statement allowing a six month period reprieve from the MiFIR LEI requirements for both investment firms and trading venues (here) (“Statement”). This was due to a number of indications that not all such entities would be able to obtain LEI codes from relevant clients, or issuers, as applicable prior to 3 January 2018.
LEI for Investment Firms
Under the terms of ESMA’s statement, an investment firm may provide a service to a client that is a legal person, which triggers the transaction reporting obligation, where it has not previously obtained the client’s LEI in certain circumstances. Specifically, before providing the relevant service, the investment firm must obtain the necessary documentation from the client to apply for an LEI on the client’s behalf and must apply for the issuance of the LEI immediately. Once the investment firm obtains the relevant LEI it must submit its transaction report.
As a result of the above reprieve, national competent authorities will be required to temporarily amend a validation rule in their transaction reporting systems to allow for the acceptance of transaction reports where the LEI issuance date is after the transaction execution date. In its Statement, ESMA invites investment firms to contact their NCA directly for the specific details regarding these amendments.
LEI for Trading Venues
Trading venues are expected to use the LEI codes pertaining to a given issuer when submitting reference date on financial instruments issued by EU issuers. However, in the case of non-EU issuers, trading venues will be temporarily allowed to report their own LEI codes instead of those of the non-EU issuers. Trading venues must, however, reach out to the non-EU issuers to inform them about the applicable requirements under both MiFIR and the Markets Abuse Regulation 596/2014 (“MAR”), and to obtain their LEI codes.
ESMA’s Statement will no doubt be greeted with considerable relief by investment firms, their clients, trading venues and non-EU issuers. However, it is worth nothing that the requirement (or recommendation) to use a LEI is embedded in a range of other EU legislation and the Statement does not affect those other requirements. For example, the European Markets Infrastructure Regulation 648/2012 requires, among other things, the reporting of all derivatives transactions to trade repositories, which reports are required to identify entities by their LEI.
It has also been reported that a number of investment firms have chosen not to rely on the Statement insofar as it relates to the requirement that they obtain relevant client LEIs, whether because of IT challenges in implementing related changes to operational processes at such a late stage or the compliance risk and expense associated with obtaining LEIs on behalf of relevant clients.