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Opinion: LEI – Persistent or Unique Identity?

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?

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