Seeking security
18 Sep 2024
Clelia Frondaroli explores the legacy of past and present LEI legislation, and questions the extent of their influence along the way
Image: nonnie192/stock.adobe.com
As financial regulations undergo change at an accelerating rate, it is important to revisit the lasting impact prior reforms have had.
One such regulation, the implementation of the compulsory use of legal entity identifiers (LEIs) in over-the-counter (OTC) derivative transaction reporting in Australia, will mean that all businesses that engage in OTC transactions will need to submit a LEI. Although the Australian Securities and Investments Commission (ASIC) has so far permitted companies to submit to the derivative reporting repository using Avox International Business Entity Identifiers (AVIDs) or Bank Identification Codes (BIC), this will soon change from October onwards. However, as the deadline of 21 October looms, questions can be raised surrounding the broader legacy of LEIs and their impact over the past decade in maintaining secure transactions within financial markets.
What then are LEIs, and have they been vital in guaranteeing transparency in financial markets?
Varying speeds, varying priorities
Legal entity identifiers are unique identity codes attached to each entity participating in the global financial ecosystem. Developed in the aftermath of the 2008 financial crisis, Chris Donohue, CEO of APIR, characterises LEIs simply as reference markers to identify ‘who is who’ and ‘who owns what’.
Yet, the global implementation of LEIs over the past decade has not been a clearcut route. Rather, financial institutions and global regulators have had to navigate certain roadblocks in enforcing LEIs across jurisdictions. As Trilliam Jeong, CEO of Wealthblock, explains: “Markets around the world have been slower to adopt LEIs compared to the EU and US, and there are a few reasons for that: some countries don’t have the tech infrastructure to support LEIs, making it tough to integrate into global systems and others might resist adopting global standards like LEIs due to concerns about sovereignty, political priorities, or international oversight.”
This is similarly stressed by the global legal entity identifier foundation (GLEIF), who underlines: “The speed at which regulators move varies significantly according to various factors, including legislative processes, regulatory developments, and, of course, local priorities.”
However, local priorities aside, the broader regulatory landscape suggests that LEI coverage has and will continue to improve. GLEIF notes that: “There are currently over 200 mandates requiring the use of the LEI in financial market reporting globally.” This suggests that global mandates for LEIs are expanding, further exemplified by the recent Reserve Bank of India (RBI) regulation requiring enterprises to provide LEI information for single payment transactions exceeding 500 million rupees (US$6 million). As Volker Lainer, head of data integrations, ESG, and regulatory affairs at GoldenSource, summarises: “When you consider the distribution of companies globally, this split is fairly representative across regions overall.”
Seeing through blind spots
But how exactly has the implementation of LEIs actively contributed to improving security surrounding financial transactions? Looking at the regulatory landscape that existed prior to the 2008 financial crisis, Jeong is quick to underscore the numerous blind spots which had obscured vulnerabilities in market systems and minimised regulators’ ability to identify threats. He emphasises: “LEIs [have provided] a standardised way to identify legal entities, making it easier for regulators and financial institutions to track relationships between companies and improve regulatory oversight.”
This is a key sentiment echoed by Lainer and GLEIF alike. Both agree that transparency, improved risk monitoring and greater visibility of market participants are all products of LEI implementation, where the availability of LEI data has enabled authorities to respond to emerging risks at an accelerated pace. However, some degree of scepticism has lingered, especially notable during the early days of implementation. As Lainer admits, clients initially doubted the degree to which LEIs would provide security. He recounts: “When Stephan Wolf, former CEO of GLEIF, gave a keynote speech at one of our customer events back in 2016, there was a lot of scepticism around the chances of this LEI undertaking would be a success.”
Some might further argue that not all credit for market security can be attributed to LEIs. As Jeong points out: “While [LEIs] have been useful, they’re just one part of a broader set of reforms aimed at preventing future financial crises.”
Harmony across borders
These broader sets of reforms, regulations such as the EMIR Refit in the EU and the Clearing House Automated Payment System (CHAPS) in the UK, all work in conjunction with LEIs to mitigate risks and remain pivotal when looking at the overall impact of entity identification. Yet, as the number of regulations increase globally, have LEIs been successful in harmonising regulations across borders?
When questioned, Jeong assures that: “LEIs are a good start but there’s still more to do to fully align global regulations”.
He continues: “LEIs have helped make cross-border financial regulations more consistent by giving everyone a standard way to identify companies. However, full harmonisation isn’t there yet because not all countries have adopted LEIs.” Instead, he proposes that communication is key, where true standardisation between policies relies on an “ongoing dialogue between regulators and industry stakeholders.”
A lens on Australia
As the October deadline looms for the compulsory use of LEIs for OTC transactions in Australia, it also brings wider questions regarding ASIC’s choice to not require an annual renewal of these identifiers (labelled as a ‘non-compulsory’ renewal). GLEIF, in response to this, comments: “Compulsory LEI renewals are essential to maintaining data integrity and accuracy, which are critical for risk management in global derivatives markets. Without regular renewals, there is a risk of outdated or inaccurate data, weakening oversight and transparency.”
This factor of risk is similarly re-iterated by Jeong, who explains that outdated data creates “gaps in oversight”, where inconsistent rules and regulations across international borders may lead to a weakened global risk management system. “Regular renewals are crucial for keeping the financial system safe,” he firmly concludes.
Lainer, however, points out that while Australia’s non-compulsory renewal may be a limitation that could result in reduced reliability, the streamlining of OTC reporting is “a move in the right direction”.
When evaluating the overall impact of LEIs, therefore, a narrative is presented in which firms gain increased credibility in financial markets, an extra degree of transactional security, and improved transparency for regulators and industry stakeholders. With businesses and countries under increasing pressure to better align themselves with international regulations, GLEIF clarifies once more: “The role of LEIs in preventing potential market disruptions cannot be understated.”
One such regulation, the implementation of the compulsory use of legal entity identifiers (LEIs) in over-the-counter (OTC) derivative transaction reporting in Australia, will mean that all businesses that engage in OTC transactions will need to submit a LEI. Although the Australian Securities and Investments Commission (ASIC) has so far permitted companies to submit to the derivative reporting repository using Avox International Business Entity Identifiers (AVIDs) or Bank Identification Codes (BIC), this will soon change from October onwards. However, as the deadline of 21 October looms, questions can be raised surrounding the broader legacy of LEIs and their impact over the past decade in maintaining secure transactions within financial markets.
What then are LEIs, and have they been vital in guaranteeing transparency in financial markets?
Varying speeds, varying priorities
Legal entity identifiers are unique identity codes attached to each entity participating in the global financial ecosystem. Developed in the aftermath of the 2008 financial crisis, Chris Donohue, CEO of APIR, characterises LEIs simply as reference markers to identify ‘who is who’ and ‘who owns what’.
Yet, the global implementation of LEIs over the past decade has not been a clearcut route. Rather, financial institutions and global regulators have had to navigate certain roadblocks in enforcing LEIs across jurisdictions. As Trilliam Jeong, CEO of Wealthblock, explains: “Markets around the world have been slower to adopt LEIs compared to the EU and US, and there are a few reasons for that: some countries don’t have the tech infrastructure to support LEIs, making it tough to integrate into global systems and others might resist adopting global standards like LEIs due to concerns about sovereignty, political priorities, or international oversight.”
This is similarly stressed by the global legal entity identifier foundation (GLEIF), who underlines: “The speed at which regulators move varies significantly according to various factors, including legislative processes, regulatory developments, and, of course, local priorities.”
However, local priorities aside, the broader regulatory landscape suggests that LEI coverage has and will continue to improve. GLEIF notes that: “There are currently over 200 mandates requiring the use of the LEI in financial market reporting globally.” This suggests that global mandates for LEIs are expanding, further exemplified by the recent Reserve Bank of India (RBI) regulation requiring enterprises to provide LEI information for single payment transactions exceeding 500 million rupees (US$6 million). As Volker Lainer, head of data integrations, ESG, and regulatory affairs at GoldenSource, summarises: “When you consider the distribution of companies globally, this split is fairly representative across regions overall.”
Seeing through blind spots
But how exactly has the implementation of LEIs actively contributed to improving security surrounding financial transactions? Looking at the regulatory landscape that existed prior to the 2008 financial crisis, Jeong is quick to underscore the numerous blind spots which had obscured vulnerabilities in market systems and minimised regulators’ ability to identify threats. He emphasises: “LEIs [have provided] a standardised way to identify legal entities, making it easier for regulators and financial institutions to track relationships between companies and improve regulatory oversight.”
This is a key sentiment echoed by Lainer and GLEIF alike. Both agree that transparency, improved risk monitoring and greater visibility of market participants are all products of LEI implementation, where the availability of LEI data has enabled authorities to respond to emerging risks at an accelerated pace. However, some degree of scepticism has lingered, especially notable during the early days of implementation. As Lainer admits, clients initially doubted the degree to which LEIs would provide security. He recounts: “When Stephan Wolf, former CEO of GLEIF, gave a keynote speech at one of our customer events back in 2016, there was a lot of scepticism around the chances of this LEI undertaking would be a success.”
Some might further argue that not all credit for market security can be attributed to LEIs. As Jeong points out: “While [LEIs] have been useful, they’re just one part of a broader set of reforms aimed at preventing future financial crises.”
Harmony across borders
These broader sets of reforms, regulations such as the EMIR Refit in the EU and the Clearing House Automated Payment System (CHAPS) in the UK, all work in conjunction with LEIs to mitigate risks and remain pivotal when looking at the overall impact of entity identification. Yet, as the number of regulations increase globally, have LEIs been successful in harmonising regulations across borders?
When questioned, Jeong assures that: “LEIs are a good start but there’s still more to do to fully align global regulations”.
He continues: “LEIs have helped make cross-border financial regulations more consistent by giving everyone a standard way to identify companies. However, full harmonisation isn’t there yet because not all countries have adopted LEIs.” Instead, he proposes that communication is key, where true standardisation between policies relies on an “ongoing dialogue between regulators and industry stakeholders.”
A lens on Australia
As the October deadline looms for the compulsory use of LEIs for OTC transactions in Australia, it also brings wider questions regarding ASIC’s choice to not require an annual renewal of these identifiers (labelled as a ‘non-compulsory’ renewal). GLEIF, in response to this, comments: “Compulsory LEI renewals are essential to maintaining data integrity and accuracy, which are critical for risk management in global derivatives markets. Without regular renewals, there is a risk of outdated or inaccurate data, weakening oversight and transparency.”
This factor of risk is similarly re-iterated by Jeong, who explains that outdated data creates “gaps in oversight”, where inconsistent rules and regulations across international borders may lead to a weakened global risk management system. “Regular renewals are crucial for keeping the financial system safe,” he firmly concludes.
Lainer, however, points out that while Australia’s non-compulsory renewal may be a limitation that could result in reduced reliability, the streamlining of OTC reporting is “a move in the right direction”.
When evaluating the overall impact of LEIs, therefore, a narrative is presented in which firms gain increased credibility in financial markets, an extra degree of transactional security, and improved transparency for regulators and industry stakeholders. With businesses and countries under increasing pressure to better align themselves with international regulations, GLEIF clarifies once more: “The role of LEIs in preventing potential market disruptions cannot be understated.”
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