About a-team Marketing Services
The knowledge platform for the financial technology industry
The knowledge platform for the financial technology industry

A-Team Insight Blogs

Opinion: LEI – Persistent or Unique Identity?

Subscribe to our newsletter

By Chris Pickles, Head of Industry Initiatives, BT Global Banking & Financial Markets

I’ve been struggling to understand the details behind the current initiative to create a Legal Entity Identifier (LEI) – particularly an LEI as an ISO standard. One of the problems that we all often face when we get deeply immersed in a subject is that we may know what we mean, but we find it difficult and time-consuming to explain clearly to other people what we mean.

The financial sector has been trying for close on 15 years to come up with an international standard that uniquely identifies a business entity anywhere in the world. At the same time there has been the usual ‘stiction’ – the friction that makes things stick the way that they are and that stops things moving.

Financial institutions don’t want to change their systems: it costs money to change. Rather than implementing something new, they try to use something that they’ve already got to meet the additional requirement.

The BIC code (ISO 9362) is an example of this, gradually changing from being just a network address for a bank to now being defined as a unique identification code for financial and non-financial institutions. Meanwhile, work went on in ISO circles to develop an International Business Entity Identifier by people who saw that the BIC code would not meet the ultimate industry requirement, while in parallel the ‘stiction’ came into play to try to use the existing BIC code format instead.

Now, largely initiated by pressure from market regulators in the US, the initiative to create an LEI is to have identifiers that have ‘persistence’. The aim is to be able to follow the risk exposure to or of any entity, even if it relocates to another jurisdiction.

Remember that the US is a federation of states, and a legal entity is domiciled in an individual state rather than in the country of US, so merely by moving its domicile from one state to another within the US it causes a problem of tracking the business and its associated risks. Moving its domicile to another country would also have the same effect. That’s why the regulators and banks want to have ‘persistence’ of the LEI: the entity would retain the same LEI wherever it moved to, and so the risks associated with it could be tracked persistently.

This is where words and definitions become particularly important, to make sure that we all know what we all mean. A legal entity has no pure existence of its own: it exists as a legal entity under the jurisdiction of the state or country in which it is domiciled. If it re-domiciles to another jurisdiction, it become a different legal entity. That means that having a ‘persistent’ LEI would mean that the new legal entity in its new domicile and the old legal entity in its old domicile would both have the same LEI. That in turn means that a LEI is not a unique identifier of a legal entity: it can’t be if the same identifier can identify both the old one and the new one.

Whether a re-domiciled legal entity would have the same risk profile as in its previous domicile is of course questionable. It’s unlikely that an entity domiciled and regulated in New York that re-domiciles to an offshore tax haven with dubious local regulations would retain the same risk profile in the eyes of US regulators or of the other institutions that have a risk exposure to it.

A ‘business’ can be made up of multiple legal entities. In principle, a legal entity is unique. It seems that with the new proposals for a LEI we have a LEI that does not uniquely identify a legal entity, but does identify a business. By having ‘persistence’, the LEI would therefore not be an international Legal Entity Identifier but an international Business Entity Identifier.

So maybe the LEI is a replacement for the IBEI after all. But the industry still doesn’t end up getting a unique identifier of legal entities that allows everyone to see which separate legal entities are part of an overall business. And being able to have a hierarchical view of ownership and risk within an overall business is one of the key goals of the regulators and of the banks.

Is the industry taking a step forward, or a step sideways?

Subscribe to our newsletter

Related content

WEBINAR

Recorded Webinar: In data we trust – How to ensure high quality data to power AI

Artificial intelligence is increasingly powering financial institutions’ processes and workflows, encompassing all parts of the enterprise from front-office to the back-office. As organisations seek to gain a competitive edge, they are trialling the technology in variety of ways to streamline and empower multiple use cases. Some are further than others along the path to achieving...

BLOG

FinScan Data Quality Chief Seeks to End Compliance Failure Excuses

The dog ate my homework. The train was delayed. The postman mislaid your birthday card. At one time or another, we’ve all used a weak excuse to forestall censure for an error of behaviour or judgement. And mostly, we’ve got away with it. In financial regulatory compliance, however, excuses won’t wash. Especially when it comes...

EVENT

TradingTech Summit MENA

The inaugural TradingTech Summit MENA takes place in November and examines the latest changes and innovations in trading technology and explores how technology is being deployed to create an edge in sell side and buy side capital markets financial institutions in the region.

GUIDE

Regulatory Data Handbook 2022/2023 – Tenth Edition

Welcome to the tenth edition of A-Team Group’s Regulatory Data Handbook, a publication that has tracked new regulations, amendments, implementation and data management requirements as regulatory change has impacted global capital markets participants over the past 10 years. This edition of the handbook includes new regulations and highlights some of the major regulatory interventions challenging...