ESMA, the European Securities and Markets Authority, has published a briefing which addresses issues having to do with the so-called Legal Entity Identifier (LEI), a 20-digit alphanumeric code that is to be required of business entities engaging in financial transactions under the EU’s soon-to-be in force MiFID II.
From 3 January next year, companies subject to MiFID II transaction reporting obligations will not be able to execute a trade on behalf of a client who is eligible for a Legal Entity Identifier (LEI) number and does not have one.
The ESMA70-145-238 Legal Entity Identifier Briefing Note published by ESMA comes as the European securities regulator notes its previous experience of implementing the LEI under EMIR (European Market Infrastructure Regulation) for over-the-counter derivatives.
“ESMA urges reporting entities not to delay in addressing this important matter, as advance preparation will help in avoiding backlogs, and ensuring that all market participants are ready for the new regime,” the regulator stated, suggesting that backlogs may have been an issue in the past.
ESMA chairman Steven Maijoor said ESMA expected that “all relevant trading venues and investment firms” would comply with the MiFID II requirements on LEIs, ahead of the implementation of the new regime” in January.
“LEIs play a key role under the new MiFID data-reporting regime, as well as being essential in supporting regulators work on transparency and market surveillance,” he added. “It is vital that investment firms and trading venues make the necessary efforts to obtain their LEIs in good time.
“This is not a difficult process, if you make the effort now you can obtain your LEI within a short time frame, it costs a few hundred euros and will save you time and expense in the long run, while providing comfort to your clients, counterparties and regulators.”
The LEI is also being used or is in the process of being adopted by other jurisdictions, such as the US, Canada and in the Asia-Pacific.
The unique identifier it provides facilitates cross border financial transactions, but also enables risk management, and for regulators facilitates market surveillance. For risk management, the LEI facilitates more accurate calculation of counter-party exposure.
Another EU law, the Markets in Financial Instruments Regulation (MIFIR) 19, introduces requirements for a number of entities to be identified through the LEI:
- investment firms that execute transactions in financial instruments;
- the clients (buyer, seller) on whose behalf the investment firm executes transactions, when the client is a legal entity;
- the client of the firm on whose behalf the trading venue is reporting under MIFIR Article 26.5, when the client is a legal entity;
- the person who makes the decision to acquire the financial instrument, when this person is a legal entity (eg, this includes investment managers acting under a discretionary mandate on behalf of its underlying clients);
- the firm transmitting the order;
- the entity submitting a transaction report (ie, trading venue, ARM, investment firm); and
- the issuer of any financial instrument listed and/or traded on a trading venue.
“The above entities will need to be identified with an LEI even if they had no previous legal obligation to obtain one and regardless of where they are operating or legally based,” ESMA notes.
The European level regulator has been busy in recent months with a number of announcements regarding the pending MiFID II implementation, concurrent risks for investors, and its forecast priorities for 2018.