The International ISO standard 17442 is used for the Legal Entity Identifier. LEIs are identification numbers that allow for the uniform and correct identification of all legal entities involved in financial transactions, including non-financial organizations. They allow a legal party to a financial transaction to be precisely recognized. It connects to a data collection containing crucial information about the transacting entity, which may also include information about the entity’s ultimate ownership.
- The Legal Body Identifier (LEI) program aims to build a worldwide reference data system that uniquely identifies every legal entity or structure that is a party to a financial transaction in any jurisdiction.
- The creation of a Global LEI System (GLEIS), which has been endorsed by the G20, is crucial to enhancing the assessment and monitoring of systemic risk. Global, standardized LEIs will allow regulators and organizations to more efficiently evaluate and manage counterparty exposure while also eliminating long-standing entity identification challenges throughout the world.
- Local Operating Units (LOUs) have been developed to help in the worldwide allocation of LEIs and must be sponsored by local regulators to allocate and maintain LEIs to enterprises on a cost-recovery basis.
- The European Securities and Markets Authority (ESMA) has required the use of the LEI for the reporting of derivative transactions to Trade Repositories under European Market Infrastructure Regulation (EMIR). Market operators are required by MiFID II and the Market Abuse Regulation (MAR) to compile an LEI for each issuer with securities authorized to trade.
- All MiFID II-regulated investment businesses will be obliged to keep a valid LEI. Firms subject to MiFID II transaction reporting duties will be unable to conduct a deal on behalf of a customer who is qualified for an LEI but lacks one.
- The legal entity identifier (LEI) code is a one-of-a-kind identifying code assigned to entities that trade in financial markets. These Financial Markets might include equities, bonds, futures, currencies, and so on. A lei code will link the transactions or dealings done in the markets by one entity to another entity. LEI codes are commonly used by authorities to monitor financial markets. LEI facilitates the connection of financial markets, businesses, and regulators.
Why is an LEI code necessary?
When alerting regulatory bodies of transactions involving securities belonging to a customer who is a legal entity, incorporated businesses having the right to provide investment services are required to use an LEI code. If the legal entity customer does not have an LEI code, it will be unable to meet the reporting obligation and, as a result, the legal entity’s transaction orders will be unable to be fulfilled.
As we discussed the LEI code. So, based on the foregoing, we can conclude that to ensure financial market transparency, the bank may bring more and more entities under the ambit of LEI, which will assist banks in ensuring and knowing the history and transactions of their customers to avoid any risk of NPAs in the future.