The Financial Sector Conduct Authority (FSCA) recently released a document pertaining to the importance and benefits of adopting a Legal Entity Identifier (LEI), with the goal of encouraging regulated entities to implement LEIs.

The LEI is a 20-digit, alpha-numeric code, which connects to key reference information and is used to uniquely identify legally distinct institutions that engage in financial transactions. An LEI, in its simplest form, is a global identity number of a legal entity. The LEI definition currently relies on a standard published by the International Organisation for Standardisation (ISO) on 30 May 2012 (ISO 17442:2012, Financial Services).

LEIs are issued by “Local Operating Units” (LOUs) and accredited by the Global Legal Entity Identifier Foundation (GLEIF). The GLEIF is tasked to support the implementation and use of LEIs. The GLEIF is backed and overseen by the LEI Regulatory Oversight Committee (ROC), representing public authorities from around the globe that have come together to jointly drive forward transparency within the global financial markets.

LEIs were introduced following the Global Financial Crisis of 2008 so that all participants and financial institutions/ or legal entities in the financial system would be easily identifiable in order to facilitate assessment and monitoring of financial stability. The global LEI initiative is driven by the Financial Stability Board (FSB) and the Group of Twenty (G20).

A globally unique identification system for legal entities may benefit market participants and authorities in several ways, once it is broadly adopted. Transparency requirements for financial institutions to publish information with their own LEI makes it easier for market participants, including investors, to retrieve the information and match it with other information in their own risk analysis.

The use of the LEI could also enhance banks’ management of information across legal entities, facilitate a comprehensive assessment of risk exposures at the global consolidated level and improve the speed at which information is available internally, especially after a merger or acquisition.

There is a considerable degree of interconnectedness among legal entities operating in a global economy, both within the financial sector and between the financial and non-financial sectors. This interconnectedness needs to be monitored to understand risk and its build up, thereby assisting in enhancing financial stability.

In particular, the ability to uniquely identify entities, along with knowledge of how entities are interlinked, is necessary to measure and manage the risk of contagion among entities, sectors and countries. At the global level, the LEI has been given the important role of unequivocally identifying legal entities involved in financial transactions. The LEI is valuable to regulators and other authorities for evaluating systemic risk (particularly in times of crises), conducting market surveillance and enforcement, supervising market participants, implementing resolution decisions, preparing high quality financial data and undertaking other public functions.

Other advantages are also available to the wider financial industry, non-financial industry and academics. The LEI allows the private sector to foster improved risk management, increased operational efficiency and more accurate calculation of exposures, as well as addressing other needs.

The LEI has benefits over other identifiers that currently exist at national or regional level. The global nature of the LEI is important because (i) trade and financial streams do not stop at the border of a country and (ii) many South African entities are part of, or otherwise directly connected to, entities in other parts of the world. Properly identifying (parties within) such group structures is only possible with a global identifier.

LEIs can support the global work on Anti-money Laundering/Counter-Terrorist Financing/Countering Proliferation Financing by enabling the efficient identification and verification of legal entities through a single global identity number, which can also provide added information on, for example, beneficial ownership.

South African developments

 The FSCA serves on the LEI ROC Plenary and Executive Committee and, before the establishment of the GLEIF, acted as a sponsoring authority, which entailed being responsible for the submission of applications by South African pre-LOUs to the ROC and providing confirmation to the ROC that all pre-LOU endorsement requirements have been complied with, both at the time of the application and on an on-going basis.

 Apart from the FSCA’s role in the ROC, there are various other local developments surrounding the implementation of LEIs in South Africa that should be noted:

• Endorsement of pre-LOU: On 18 December 2015, the ROC endorsed Strate (Pty) Ltd (Strate) as a pre-LOU. As of the date of this endorsement, all certified codes issued by Strate are globally recognised by the ROC for reporting purposes. Strate (as a pre-LOU) went live with the LEI application program in February 2016. Strate was fully accredited as an LOU by the GLEIF Accreditation Team effective 31 May 2018.
• FMA Conduct Standard 3 of 2018: In South Africa the use of LEIs by OTC Derivatives Providers to report transactions to a Trade Repository was mandated in FMA Conduct Standard 3 of 2018: Conduct Standard for Reporting Obligations in Respect of Transactions in Over-The-Counter Derivatives, which was published on 11 October 2018.
• International Securities Identification Number (ISIN): 1 The global initiative2 of linking ISINs and LEIs maps new and legacy ISINs to their corresponding LEIs. By linking the two ISO standards together, firms will be able to aggregate the data required to gain a clear view of their securities exposure within a given issuer and its related entities. Once implemented, the ISIN-to-LEI mapping table will be made freely available to all, without restriction, on both the GLEIF and the Association of National Numbering Agencies (ANNA) websites. The JSE Limited, as the National Numbering Agency in South Africa, signed in April 2020 the formal agreement with ANNA to join the ISIN-LEI mapping initiative. As part of their ANNA obligation, they are currently requesting an LEI from the Issuer, for every ISIN issued. This LEI/ISIN data is uploaded to the Global ASB (ANNA Service Bureau) database for reporting to GLEIF.
• Reporting and Disclosure of Short Sales: The use of a LEI is proposed to be mandated in the Draft Conduct Standard – Requirements relating to the Reporting and Disclosure of Short Sales, which was published for public comment on 31 March 2023. The final Conduct Standard will be published in due course.
• Reporting of transactions in core funding markets: The South African Reserve Bank requires commercial banks to include the LEIs of counterparties in qualifying money market transactions reported daily. The reporting instructions are detailed in the SARB’s Money Market Data Collection Framework, which will be expanded to include foreign exchange market transactions in 2024.
• Securities Finance Transactions (SFT): As part of the policies identified by the FSB to increase transparency across SFTs, the FSCA is in the process of formulating a Conduct Standard for the SFT market in South Africa. The proposed Conduct Standard will include a number of new rules for market participants, including a requirement for counterparties to SFTs to report the details of any SFTs they have concluded, as well as any modification or termination thereof, to the FSCA. It is envisaged that in the reporting of SFT transactions, the Conduct Standard will require the use of an LEI.

 Global developments

 The use of an LEI is already required under a number of European Union (EU) regulations and directives such as:

• European Markets Infrastructure Regulation (EMIR) – counterparties to derivatives contracts as well as beneficiaries, brokers, Central Counterparties and clearing members. 
• Market Abuse Regulation (MAR) – issuers of financial instruments, entities responsible for reporting suspicious transactions. 
• Capital Requirements Regulation (CRR) – credit and financial institutions. 
• Alternative Investment Funds Directive (AIFMD) – funds and fund managers. 
• Credit Rating Agencies Regulation (CRAR) – credit rating agencies and rated entities. 
• Solvency II – pension funds and insurance companies.

 Regulatory use of the LEI has been expanded to other industries and business cases. Additional rules implementing the LEI have been issued in several jurisdictions. New regulations introduced the LEI into banking supervision (Australia and China), for credit rating agencies (China), in the insurance sector, corporate credit and non-derivatives sectors (India), for asset management and market surveillance (in the EU), in securities markets (in China for certain securities issuers, investors and in order to open a securities custody account) and securitisation (in the EU), for statistical purposes (in China for reporting loans and foreign assets and liabilities for statistical purposes) and for foreign exchange and physical trade (China).

 Some countries have also issued a roadmap for the implementation of the LEI in the coming years, such as China for its impact on cross-border payments.

 GLEIF, in cooperation with the ROC, has several initiatives to promote LEI adoption more broadly, including bulk LEI registration by intermediaries and business registries – which could both lead to a significant reduction of per capita fees and increase network effects – and additional LEI features that could incentivise voluntary adoption, such as the verifiable LEI (vLEI), i.e. a digitally verifiable credential containing the LEI.

Further improvement in the quality of LEI data remains a GLEIF and ROC priority to enhance the effective use of the LEI and broaden adoption.