The Legal Entity Identifier (LEI) is alive and well, with numbers of active LEIs growing through 2022 despite no additional regulatory mandates, and new use cases of the identifier including cross-border payments expected to further expand not only numbers, but also acceptance and adoption of the standard.
Data Management Insight recently talked to Stephan Wolf, CEO of the Global LEI Foundation (GLEIF), about the LEI’s progress, existing schemes using and promoting the LEI, and both internal and external developments being championed by the GLEIF that could make the LEI centre stage in global business transactions.
Wolf described 2022 as ‘a remarkable success’ for the LEI considering no major mandatory regulatory requirements for the identifier were set out during the year. Growth in LEI numbers hit 13% for a total number of active LEIs of 2.2 million. India and China led the way in terms of active LEIs, in part due to their inclusion in payment messages. Not so positive, and a reflection of previous years, Wolf noted that Europe, Canada and the US, while leading in capital money markets, showed no major movement in active LEIs.
The elephant in the room
This was, and is, particularly the case in the US, which remains the elephant in the room. GLEIF, however, is not giving up hope here and notes regulatory programmes that could adopt the LEI. Wolf said: “The SEC looked at putting out rules on an LEI availability basis for reporting, but that would only help a little as firms would not be required to acquire an LEI.”
More promising, but as yet uncertain, is the US Financial Data Transparency Act (FDTA), which was passed by Congress and became law on 23 Decmber 2022. The FDTA requires seven of the financial regulatory member agencies of the US Financial Stability Oversight Council to adopt and apply uniform data standards for information collected from regulated entities.
The necessary common entity identifier could, Wolf said, be the LEI. “The LEI fits the law very well. Over the next two years regulators will look at an identity code. They have asked us to be patient. We are hopeful.”
LEI issuance schemes
GLEIF’s work over the past year has also included developing existing and new LEI issuance schemes. Additional LEI validation agents have been onboarded and there are now more than 10 working across Africa, China, Europe, India, the Middle East, and North America.
Looking forward, and based on a Financial Stability Board (FSB) report exploring options to improve the adoption of the LEI, in particular for use in cross-border payments, Wolf said: “More and more banks are signing NDAs and embracing the FSB’s recommendations to use the LEI in payments. If banks use the LEI like this, the identifier could also be used in other areas. Here, the validation agency infrastructure would allow more LEIs to be cut quickly.”
The promise of payments
While the FSB is not expected to implement the LEI in cross-border payments before 2027, G20 countries on the Swift network could adopt use of the LEI sooner. This, and payments schemes already in place in India and China, would mark a major step-up for the identifier that was initially used in derivatives markets after the 2008 financial crisis, but could be used in other financial transactions.
“Today, a payment requires the name and address of the payee and recipient. Replacing these details with an LEI would make a more agile world and allow real-time payments,” said Wolf. Early schemes could, he added, provide a phase in approach and discovery of what is possible.
The supply chain could also benefit by using LEIs to close the gap between different schemes used by payment flows and processes of selling products and services. Here the LEI on both sides of the equation could increase efficiency and reduce costs.
Internet transactions are another potential use case of the LEI. Wolf commented: “The big theme is one entity identity for all business and payments transactions. This would help companies do these things more easily.”
The digital LEI
The verifiable LEI (vLEI) is also gaining ground with the first qualified issuer getting underway towards the end of 2022. The vLEI is a digitally trusted version of the LEI, and has the potential to meet the need for automated digital verification of the legal identity of businesses.
Wolf comes back to payments as early transactions that could initially use the LEI and over the longer term the vLEI, which not only supports trust but also scalability.
LEI database enhancements
Enhancements to the LEI search engine itself are also being made with ‘legal entity event’ data, such as M&A activity, being added to show and track name and address changes long before they appear in business registries. This track and trace service is already underway and will be extended later this year to include vendor data feeds covering any event changes that are not yet included.
While the LEI was not an instant success and initially served only to tame derivatives markets, the breaking point came in 2018 when ESMA demanded the inclusion of LEIs in regulatory reporting for MiFID II and MiFIR. As well as boosting the LEI, the requirement reflected ESMA’s trust in the GLEIF, which has since been expressed by regulators in other jurisdictions.
The next question has to be if and when trust in GLEIF will allow the foundation to move on from issuing LEIs to meet regulatory mandates, and provide digital LEIs for global business transactions outside the financial regulatory framework. Wolf concluded: “We believe the horizon here is five to 10 years.”
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