The Global LEI Foundation (GLEIF) has set strategy that will make the Legal Entity Identifier not only essential to smooth running of capital markets, but also the wider digital economy. Achieving these goals is a matter of hindsight and innovation based on the GLEIF’s decision to drive extended use of the LEI in the private sector, rather than through regulatory mandates.
Recent initiatives along the way include validation agents that can cut the cost and ease the process of registering for an LEI, and verifiable LEIs (vLEIs) that could provide automated identity verification between counterparties. Stephan Wolf, CEO at the GLEIF, recently shared his thoughts on how the LEI has developed since its introduction back in 2013 and his vision for its future with Data Management Insight.Looking back, Wolf describes the first five-year strategy for the LEI as building the GLEIF and managing its structure, a task interrupted towards the end of the period by the implementation of MiFID II and MifIR and an escalation in regulatory demand for LEIs. “In 2018, we had two choices, to wait for more regulations mandating use of the LEI and manage the GLEIF as the operational arm of the LEI Regulatory Oversight Committee (ROC) as initially planned, or do more. We had the appetite to do more and moved forward to look at voluntary adoption of the LEI by private sectors. We needed to do this, as well as work with regulatory mandates.”
Market resistance to the LEI
The next five-year strategy was based on this expansion, but first asked why there was market resistance to the LEI. It had support, but implementation was slow. Wolf cites three reasons:
- Cost, firms didn’t like the $50 to $70 fee for each LEI and were reluctant to adopt the identifier, although the cost has come down in the past couple of years. The cost of projects around the LEI such as linking it into a database was also a problem.
- The fact that while banks were mandated to use the identifier for reporting, counterparties did not need to implement the LEI leaving cost with the banks.
- Most importantly, purpose.
In hindsight, Wolf says: “Why would a a firm want to register for an LEI if it had no application for it? The problem from day one was the need to show a purpose for the LEI and a bottom line result.”
Resolving problems and setting goals
The problems of LEI cost and adoption are being addressed by banks operating as validation agents – to date JP Morgan has signed up – which could move the LEI towards mass adoption while reducing costs. The GLEIF is also considering whether business registries, such as Companies House in the UK, could work with validation agents to issue LEIs.
“The aim is to foster growth and take out cost,” Wolf says. Large investments to implement ‘a dumb number’ need not be made either, he adds, referencing mapping services such as BIC-to-LEI and ISIN-to-LEI.
On a broader scale, he talks about digitisation of the economy. “Until recently, companies have ringfenced their systems and built everything themselves. In future, they will need to cooperate with others, such as providers of services and goods. There will be a distributed logistical supply chain driven by the Internet of Things and Industry 4.0, and it will need strong authentication.
“Firms that want to participate in the digital economy will need authentication. They can participate using the LEI and vLEI. In capital markets, we would need a network of vLEI issuers, which could be the same as LEI issuers.”
These are early days for both validation agents and the vLEI. While the concept of a validation agent has been stood up at JP Morgan, the GLEIF plans to issue vLEIs later this year. It doesn’t know how many, but wants to be ready for market demand. “If validation agents and vLEIs roll out at the same time, from 2022 there will be a high adoption rate of LEIs,” concludes Wolf.