Logo

Generic selectors
Exact matches only
Search in title
Search in content
Search in posts
Search in pages

LEI 101 – HOW IT WORKS AND WHY IT ENABLES SMARTER, LESS COSTLY AND MORE RELIABLE DECISIONS ABOUT WHO TO DO BUSINESS WITH

19/03/2019

A Q&A with GLEIF’s CEO Stephan Wolf.

 

Who is GLEIF and what is a LEI?

The Financial Stability Board (FSB) established the Global Legal Entity Identifier Foundation (GLEIF) to support the implementation and use of the Legal Entity Identifier (LEI).

 

In the past, accurately identifying legal entities on a global level has been a complex task, requiring a significant investment in time, money and resources. This was because there wasn’t a single, open and up-to-date database giving you all the information you needed.

This lack of transparency ultimately led to financial crises, fraud and market abuse.

 

LEIs trace their origins to the 2008 financial crisis, when regulators and capital market players needed to quickly assess the extent of market participants exposed to Lehman Brothers and each of its hundreds of subsidiaries. This laid bare the critical need for a system to identify and understand exposures at the legal entity level instead of the aggregate, parent-company level. If it had been available at the time, a system that assigns an electronic, standard entity identifier to legally distinct parties would have helped to fill this gap.

 

In order to remedy this, the FSB, together with the finance ministers and central bank governors represented in the G20, advocated developing a universal LEI for any legal entity involved in financial transactions.

 

The LEI is a 20-digit, alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). Each LEI connects to key reference information describing a legal entity including its ownership structure. LEIs enable smarter, less costly and more reliable decisions about who to do business with, while bringing simplicity to onboarding and transacting.

 

This is why GLEIF exists. We make available the Global LEI Index, which is the only global online source that provides open, standardized and high-quality legal entity reference data.

 

Why are LEIs important?

Current identification processes have significant manual components and often require the use of multiple databases in which a counterparty may be identified by a different name. Many banks and corporations still use names rather than identifiers, resulting in confusion. As an example, a large bank’s client services division recently found that it had an average of five names—with minor variations in its database—for the same organization. Additionally, commonly used databases, different divisions and IT systems within organizations can all have varying versions of the same entity’s name, making it harder to trace and to link information from multiple sources.

 

How do LEIs work?

It’s a simple process. A company that wishes to obtain an LEI chooses its preferred business partner from the list of GLEIF-accredited LEI issuing organizations. Through self-registration, a legal entity that then supplies accurate reference data. This reference information is validated against third party sources, before it’s hosted online for all to use.

By replacing siloed information with a standardized approach, LEIs take the complexity out of business transactions.

Since being introduced, LEIs have allowed public authorities to better evaluate risks, make corrective steps and improve data integrity. And they’re giving businesses the confidence they need to engage in transactions with total visibility, greater certainty and improved control.

 

How do LEIs fix business problems?

In our report – A New Future for Legal Entity Identification – we looked into the challenges of entity identification in financial services. We found that one of the biggest issues lay in onboarding new businesses, with streamlined onboarding far from a reality within the sector. In fact, over half (57%) of salespeople in banks said they spend 27% of their working week (or more than 1.5 days per week) onboarding new client organizations. With half (50%) of financial institutions using, on average, four identifiers to help identify client organizations during the onboarding process, inefficiencies are plaguing the process for many businesses.

 

This has significant consequences; 39% of respondents reported that there is a risk of losing business due to the length and complexity of the process. In fact, the respondents in our study believed that 15% of business is at risk as a result of the client losing patience with the process and 14% is lost because the client’s identity cannot be verified.

 

The stats further highlight how adopting LEIs for each client organization can provide slicker onboarding which leads to improved consistency, less risk of business loss and more efficient use of valuable resources. We’ve found that introducing LEIs into capital market onboarding and securities trade processing could reduce annual trade processing and onboarding costs by 10%. This would lead to a 3.5% reduction in overall capital markets operations costs (or U.S.$150 million in annual savings) for the global investment banking industry alone.

 

Why all businesses should have a LEI

There are millions of business entities on our planet, and it’s increasingly important that we can identify who is who and what is what. The LEI allows everyone to cut costs, accelerate operations and gain deeper insight into the global marketplace.

This means businesses won’t lose time and money due to an inefficient process. They can make smarter, less costly and more reliable decisions about who to do business with, because the LEI becomes the common link that pieces all records associated with an organization together. This provides certainty of identity in all online interactions, and makes it easier for everyone to participate in the global digital marketplace.

 

YOUR COMMENT

Your Comment

Email (will not be published)

Finance Derivative is a global financial and business analysis magazine, published by FM.Publishing. It is a yearly print and online magazine providing broad coverage and analysis of the financial industry, international business and the global economy.