There are mixed views in our industry about the success of the Legal Entity Identifier (LEI) – questions about lapsed identifiers, comments on a slow rate of adoption, and calls for more regulatory mandates requiring use of the LEI. There are also some tremendous successes in countries such as India, which is not a member of the Regulatory Oversight Committee (ROC) of the LEI, but has mandated the use of LEIs for credit borrowers, and Japan, where the LEI has been implemented without a regulatory mandate. Disappointments include countries such as the US, where only the Commodity Futures Trading Commission (CFTC) has mandated use of the LEI to identify OTC derivatives.
To get a clear picture of the LEI’s progress, we spent some time with Stephan Wolf, CEO of the Global LEI Foundation (GLEIF), ahead of the publication of a review of the identifier by the Financial Stability Board (FSB), which is due to be released within the next few weeks.
Looking at the numbers, over 1.4 million LEIs have been issued, and growth runs at about 600 additional LEIs a day, way down on the 10,000 a day when Markets in Financial Instruments Directive II (MiFID II) and Markets in Financial Instruments Regulation took effect in January 2018, but a credible issuance to suggest ongoing growth.
Global renewal of LEIs is almost 71%, with India leading the way with 95.5% renewals for LEIs required for credit borrowers, Finland 94%, and Japan 92%. Bringing up the rear are the US with 54% of LEIs being renewed, South Africa with 48% and the UK with 47%. In terms of lapsed LEIs, some 26%, or 368,000, of the issued total have lapsed, and a handful have been retired, merged, annulled or are duplicates.
Analysing the numbers, Wolf says uptake of the LEI is a little behind numbers anticipated in the 2018 GLEIF business plan, with a shortfall of about 50 LEIs a day, although LEI renewal is up on last year. He comments: “In absolute terms all the numbers are rising, but the percentage of lapsed LEIs has fallen from 30% last year to 26% this year.”
Lapsed LEIs are often caused by regulations such as MiFID II and MiFIR that require financial services firms to renew LEIs but not non-supervised organisations, often counterparties. The ROC and FSB are looking into the issue of lapsed LEIs, an issue that is likely to be covered in the forthcoming FSB report.
In terms of regulatory mandates for use of the LEI, there are more coming down the line, with EU regulations including Benchmark Regulation, Securitisation Regulation, and Securities Financing Transactions Regulation (SFTR) requiring the use of LEIs this year or next year. These requirements will help LEI issuance inch upwards, along with voluntary schemes such as a customs declaration in China, which is not part of the ROC, requiring an LEI identifier.
The Bank of England’s stated intent of using the LEI will also extend the identifier’s reach and increase standardisation. In a speech at an ISO 20022 conference at the bank late last year, Dave Ramsden, deputy governor for markets and banking, described changes to the Real-Time Gross Settlement (RTGS) service, including implementation of ISO 20022 via the introduction of the Common Credit Message (CMM), and longer term, the LEI to support entity identification.
He said: “Because of the benefits the Bank sees in LEIs . . . we will make them a mandatory feature of transactions between financial institutions in CHAPS. But in order to unlock the LEI’s full potential we need to encourage the adoption of LEIs amongst all those who use payment messages, not just within the financial services industry, but in all sectors of the economy, including corporates.” The cutover to ISO 20022 messaging for sending and receiving CHAPS payments is planned for 2022. Enhanced data including the LEI will be added to payment messages in 2023, with other use cases being identified in later years.
While these types of initiatives will further the case of the LEI, the elephant in the room is the US Securities and Exchange Commission (SEC), and to a lesser extent other US authorities, which could be, as it reviews MiFID II and MiFIR, and would be, a significant addition to the global LEI system.