MiFID II readiness: Tackling the Legal Entity Identifier challenge

By Laura Glynn | 6 December 2017

Initially scheduled for implementation on January 3rd, 2017, the Markets in Financial Instruments Directive (MiFID) II was pushed back to 2018 based on industry feedback regarding the exceptional technical implementation challenges that it poses for regulators and market participants alike.

With the EU commission recently ruling out any further extensions of the MiFID II deadline, it’s vital to examine the key changes that this wide-ranging regulation will impose on global financial institutions.

One of the key tasks on the regulatory checklist is the new mandatory requirement of the legal entity identifier (LEI). While the collection of LEIs is already required under several key regulations such as EMIR (European Market Infrastructure Regulation) and MAR (Market Abuse Regulation), it will become mandatory for the first time under MiFID II for firms’ subject to Transaction Reporting obligations.

Identification requirements: The rise of the Legal Entity Identifier

The Legal Entity Identifier (LEI) is a 20-character, alpha-numeric code that uniquely identifies legally distinct entities that engage in financial transactions. LEIs are issued by "Local Operating Units" (LOUs) of the Global LEI System.

In cases of individuals, the LEI is replaced with a “natural person identifier” (with some exceptions), which is derived according to the technical standards issued from ESMA (the European Securities and Markets Authority) to include, for example, passport number, tax number or a concatenation of client-specific data. The challenge here is that the evidentiary documents to this identifier may be lost, replaced or expired and so should be reviewed regularly post-onboarding in a similar way to how KYC reviews are performed.

The new LEI requirements under MiFID II mean that a bank cannot provide services to a client that triggers a transaction reporting obligation until it obtains a valid LEI for that client. Submitting transaction reports without LEI data may result in the rejection of the reports by competent authorities.

What are the LEI Requirements under MiFID II?

Legal Entity Identifier (LEI) codes will be required for the following types of legal entities:

1) All entities trading derivatives (except for private individuals)

2) All entities issuing equity, debt and all entities listed on an exchange

3) All entities trading equity or debt (except for private individuals)

4) All entities supervised by a financial regulator and their affiliates, subsidiaries and holding companies.

Current state of play of LEI adoption

In October, the total number of LEIs issued was 730,215 (up from 566,596 in mid-September ), indicating a notable surge in Q4 so far.  The uptake of LEIs globally currently breaks down to 67% in Europe, 29% in the Americas and 4% in APAC.

It is envisaged that there will be further significant demand on LOUs to issue LEIs before January 3rd, 2018. In anticipation of this, GLEIF (the Global Legal Entity Identifier Foundation) introduced the concept of “Registration Agents” earlier this year to assist legal entities to access a greater number of organizations authorized to issue LEIs. 

The Registrations Agent acts as a kind of intermediary between the client and the LEI issuer, e.g. managing communications, processing payment and validating client submissions and documentation before requesting LEI issuance.

The impact on Client Lifecycle Management

The extra-territorial impact of the LEI requirement under MiFID II cannot be underestimated. Based on the current global breakdown, the implications of varying LEI adoption rates include trades being rejected and certain jurisdictions potentially even being locked out of large markets, particularly in APAC.

So how can banks ensure they are in a strong position for the January deadline?

Many financial institutions are currently examining client data to identify clients without a valid LEI and those who hold a lapsed LEI, performing an outreach program to these clients to encourage them to apply for or renew the LEI using their Local Operating Units (LOUs) or a Registration Agent.

Client outreach is still currently operated on a highly manual basis, with very minor automation. In such a non-automated environment, MiFID II will put many client outreach divisions in banks under enormous pressure as they seek to identify, communicate with and receive correspondence from thousands of clients.

The second part of the client outreach process is to remediate and append this new information to client records. The remediation process for MiFID II really shouldn’t be underestimated as it underpins the entire data and documentation collection process.

From a technology perspective, banks will need to consider updating their client onboarding software solutions to provide real-time data fields, e.g. LEI, status of LEI, legal address, legal name, expiry date etc.

Conclusion

While the new rules are designed to make financial markets more efficient, resilient and transparent, there is no doubt that MiFID II involves significant changes to financial institutions’ compliance operations, processes, client management systems and technologies.

Although MiFID II may be viewed with a growing sense of trepidation, the LEI requirement will also provide many benefits beyond regulatory compliance for the banking industry. These include more consistent entity data, greater operational efficiencies and improved risk management.

Many firms are taking a robust proactive approach to filling any ‘LEI gaps’ with an extensive client outreach program. While it is unclear yet what enforcement will entail exactly, it is certain that there will be no relief for financial institutions from the ‘No LEI – no trade’ rule from January 3rd.


Download the whitepaper on MiFIDI II – The Final Countdown to learn more about the impacts of MiFIDI II on client onboarding and lifecycle management processes for banks in Europe and across the world

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