A requirement coming in force in the European Union in January 2018 requires entities engaged in securities trading activities to obtain a Legal Entity Identifier (LEI). This affects entities trading in, through or from the EU and the UK.

Financial markets in Europe and overseas are becoming more transparent under the growing effort of the European regulations. On January 3, 2018, the EU Markets in Financial Instruments Directive revision (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) come into force.

MiFID and MiFIR in a nutshell

The MiFID revision and the MiFIR take effect on 3 January 2018.

The MiFID regulates the provision of investment services in financial instruments by banks and investment firms and the operation of traditional stock exchanges and alternative trading venues. The regulation aims to make the European financial markets more transparent and integrated and to strengthen the protection of investors.

 While the use of a Legal Entity Identifier (LEI) was already required under several EU regulations and directives - the MIFIR is expected to create a LEI requirement and associated LEI demand for a wider expanse of financial market participants.

One of the rules for disclosure of transaction introduced by the new regulation is the requirement for investment firms and trading venues in EU member jurisdictions to record and report the LEI of each entity participating in a transaction to the competent regulatory authority.

While the new regulation covers the EU and the UK, the use of the LEI is either already required or in the process of being implemented by other regulators in the US, Canada and Asia-Pacific. It is expected to be just a matter of time until the LEI becomes the standard for entity identification in cross-border financial transactions. 

 What is Legal Entity Identifier (LEI)?

LEI is a twenty-character alpha numeric code that allows for the identification of an entity. The code is issued by Local Operating Units (LOU) duly accredited by the Global Legal Entity Identifier Foundation (GLEIF) - the supranational non-profit organization responsible for ensuring operational integrity in the Global LEI system. Reference data in respect to a LEI registration - such as entity name, type, address, local registration authority and number, ownership - becomes freely available to all interested by simply performing a search in the LEI records.    

Who is in scope?

All types of legal entities that are legally or financially responsible for the performance of financial transactions, regardless of whether the entity is for-profit or a non-profit, are eligible to obtain a LEI. Including, but not limited to:

  • Trust, irrespective of whether the trustee is an individual or an entity;
  • Partnerships;
  • Foundations;
  • Funds and collective investment schemes irrespective of the organizational form;
  • Pension funds;

Particularly under MiFIR, the entities requiring a LEI as of 3 January 2018 are:

  • Investment firms that execute transactions in financial instruments;
  • The clients (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 article 26 – financial intermediary, asset manager -, when the client is a legal entity;
  • The person who makes the decision to acquire the financial instrument, when this person is a legal entity e.g. this includes investment managers acting under a discretionary mandate on behalf of its underlying clients;
  • The firm transmitting the order;
  • The entity submitting a transaction report (i.e. trading venue, ARM, investment firm); and
  • The issuer of any financial instrument listed and/or traded on a trading venue.

What is the timeline?

Investment firms and other regulated entities that are subject to MiFIR reporting, have been setting deadlines for their clients to provide LEI as early as 1 November 2017. Firms will need this to be able to update their records and set-up systems to commence reporting under MiFIR starting 3 January 2018.

The demand for LEIs is growing and the capacity and speed for certain Local Operating Units (LOUs) may be affected. It is recommendable for entities that have not yet obtained a LEI to take immediate action to ensure continuity of business in the new year. As of 3 January 2018, entities that do not have their LEI will not be able to trade on the EU and UK markets.

TMF Group can help

With over 7,000 experts that understand local regulations situated in over 80 countries, we can help you remain compliant with the LEI requirement.

We have robust procedures and controls in place and work closely with a global Local Operating Unit to ensure your entity obtains its LEI in a timely manner. Our services also include LEI annual renewal and update, LEI deregistration and LEI data challenge.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.