Trade is perhaps the most prevalent economic activity in the world. While this dominance is essentially an advantage for market players, it also presents a unique hurdle. Identification of companies and entities involved in international trade can be quite a challenge. For this reason, principal members of international trade created the Legal Entity Identifier to promote trust, order, and transparency when making financial transactions between entities.
What Is The Legal Entity Identifier (LEI)?
The Legal Entity Identifier (LEI) is a unique alphanumeric code used across markets and jurisdictions to distinguish distinct entities involved in financial transactions. The G20 proposed the LEI after the global financial crisis that brought the world economy to its knees. The LEI is like an ID for companies involved in trade across the globe. Any legal entity such as a limited liability company or trust fund can apply for an LEI through an LEI Register. Unlike what it may seem, the process of getting an LEI is not daunting. Thanks to the internet, companies can register for an LEI in a few simple steps online.
Essentially, an LEI contains 20 alphanumeric characters that are unique to a legal entity. Every LEI record is attached to information about the legal entity to which they’re linked. Having this helps reduce the excessive opacity that may be prevalent in credit risks. The reason behind this is that LEIs enable risk managers and regulators to identify parties to financial transactions quickly and accurately. For this reason, an LEI is a linchpin for an entity’s financial data.
Who Needs an LEI?
Essentially, any legal entity that participates in financial transactions must have an LEI. What’s more, numerous mandates dictate that no entity can be involved in trade without an LEI. Moreover, several European Union regulations and directives such as European Markets Infrastructure Regulation (EMIR), Capital Requirements Regulation (CRR), and Credit Rating Agency Regulation (CRAR) have mandated LEI. Numerous directives in the United States like the Federal Reserve and the Securities and Exchange Commission (SEC) have gone a similar route.
Importance of LEI
After the global financial crisis in 2008, it was apparent that the international financial market needed swift reforms. In the collapse, regulators and private firms were unable to assess quickly the extent of the participants involved. Therefore, to avoid such a tragedy in the future, market leaders developed a global system to identify financial connections. Having this helps regulators and private corporations to comprehend the full extent of risk exposures in the financial system. Hence, this allows entities to manage risk better and more stably and consistently. Moreover, this has allowed companies to save funds used to collect, clean, and analyze data.
The LEI also plays a vital role in the banking sector. Traditional onboarding processes in numerous financial institutions involve excessive manual effort. Bringing in new clients using these systems would mean manually handling time-consuming customer identification and verification processes. Even so, the LEI presents an excellent way to optimize the onboarding process. Research has shown that financial institutions using LEI could shorten onboarding periods by as much as seven days.
How To Obtain an LEI
In addition to being a regulatory requirement, there are several benefits of having an LEI. Therefore, whether it’s for a financial institution or a personal company, obtaining an LEI is paramount. There are numerous online platforms where you can apply for an LEI in a few simple steps.
There’s no denying that transparency and trust are the pillars that hold the global financial ecosystem. For this reason, the LEI is a crucial identification requirement that every market participant should have. Although its benefits and applications are abundant, the global application of this system is slow. Hence, this shows why the LEI should be urgently and widely adopted.
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