July 1, 2022

Top 5 reasons to use the Legal Entity Identifier (LEI)

Legal Entity Identifier

Nowadays, there are many reasons to use the Legal Entity Identifier (LEI). This standard is being adopted by regulators worldwide as a unique identifier to identify financial counterparties within their data reporting requirements. Either through reference numbers or through direct LEI registration. Banks and other financial institutions are already required to use their own LEIs to comply with rules. The Securities and Exchange Commission (SEC) uses the LEI to monitor market risks.




The Legal Entity Identifier (LEI) is a new standard used by companies, regulators, and other financial organizations. So that they are uniquely identified legal entities for regulatory reporting. The companies must register and update their operational information before LEI code transfer.

The global LEI System of Legal Entity identifiers aims to improve the quality and efficiency of financial information used in the regulation. It’s also an unprecedented opportunity for businesses looking to get involved in regulatory reporting. Which is becoming more integral to the success of financial institutions.

The OECD has pleaded for all companies and businesses to register their Legal Entity Identifier (LEI). The LEI publication services provide an opportunity for participants in world financial markets to ensure that they comply with global standards. This is beneficial in the following five ways: “Registries collect, validate and standardize information about legal entity identifiers. Which can be utilized by market infrastructures and other interested parties across markets and jurisdictions.



Accessibility

The use of an LEI will allow access to more sector-specific databases such as the World Bank catalog for project financing, S&P Global Market Intelligence for analysis of financial statements, or Thomson Reuters Worldscope for macro analysis. Such databases require the LEI number to read the documents. The OECD expects market participants to use an LEI as their business identifier across all markets and sector-specific databases within three years.

Transparency

Many companies are registered under different names in different countries. Making it difficult for governments (tax authorities) and investors (equity analysts). So that they gain a full picture of the company’s associations with other firms. In addition, the use of a LEi will allow access to sector-specific data sharing portals such as Dun & Bradstreet, which contain information on trade/associate companies.- The OECD recommends that businesses should include their unique LEI when filing accounts at commercial registries.



Accessibility to Data

LEI access will allow market participants to collaborate with researchers and government agencies that require high-quality data. Market participants will find an LEI advantageous when fulfilling reporting requirements obtained through shared portals or market infrastructures such as the CME Group for energy futures. DTCC Data Repository for securities transactions, NFA for commodity derivatives. The OECD recommends companies collect their LEI number at the time of incorporation to link transactional data to company accounts.

Security issues

The OECD has suggested that if a business does not use its LEI. There is no guarantee that the number has been unique since a registry assigned it. The use of an LEI will reduce business risk if a business fails. If they comply with the OECD’s recommendations and guidance on its use. Therefore ensuring that company accounts are not misrepresented. The OECD recommends companies should submit their LEI number to all trading venues. Where they conduct transactions, for example, CME Group or DTCC Data Repository.



Compliance with International Rules

The financial market infrastructure built by the G20 is known to help countries share information about money laundering activities and terrorist financing within three years.

Using an LEI unique identifier standard will allow governments to monitor the flow of funds more closely. And allow them to detect illegal activity more easily. An LEI can also be used in antitrust cases to identify the relevant competitors in a market for merger analysis. In addition, the OECD recommends that company accounts be submitted using an LEI identifier to ensure transparency across borders and avoid misunderstandings between local jurisdictions.