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MiFID II Compliance: The Importance of Obtaining LEIs Before January 3, 2018

MiFID II Compliance: The Importance of Obtaining LEIs Before January 3, 2018

Major changes to the regulation of European financial markets are looming, with the Markets in Financial Instruments Directive (MiFID II) slated to go into effect on January 3, 2018. This much-anticipated EU legislation will impact firms that provide services to clients linked to “financial instruments” (shares, bonds, units in collective investment schemes and derivatives).

Organizations affected by this impending change are scrambling to meet the deadline, as MiFID II represents a significant shift in European financial market regulation. Financial institutions are also being asked to negotiate substantial technical and operational challenges as they race to become compliant with new rules.

For legal entities tasked with executing trades, perhaps one of the more significant tasks associated with these regulatory changes is ensuring that Legal Entity Identifiers (LEIs) are in place prior to the January 3 deadline so that they do not lose access to the financial markets.

LEIs explained

Legal Entity Identifiers are unique 20-digit alpha-numeric identification codes allowing for the consistent and accurate identification of all legal entities (including non-financial institutions) that are parties to a transaction. These codes were designed by the International Organization for Standardization to serve as an international standard for the financial services industry.

Through the use of LEIs, all legal parties to a transaction can be precisely identified, as the LEI links back to a data set of critical information about the transaction—information that may also include ownership of the entity. Additionally, LEIs play a critical role in terms of matching and aggregating market data needed to maintain transparency and serve regulatory purposes. Once an entity is assigned an LEI code, it keeps that code for the duration of its existence.

LEI vs. GMEI

It should be noted that the term GMEI (Global Markets Entity Identifier) is sometimes used interchangeably with LEI. A GMEI is simply a branded version of an LEI offered by the Depository Trust and Clearing Corporation (and the most popular current LEI solution by global market share). The GMEI utility was also among the first LEI issuers to be endorsed by the LEI Regulatory Oversight Committee. All versions of LEIs from any approved issuer will be compliant with the MiFID II registration requirement.

LEI and MiFID II compliance: The changing regulatory landscape

Major changes are coming to the transaction reporting process, as MiFID II will significantly strengthen regulatory requirements. As of January 3, all entities trading with European counterparties across all asset classes must secure LEIs, store them in their reporting system and maintain the necessary procedures to ensure that LEIs are renewed as needed.

For the first time, any firm operating under MiFID II must have LEIs in order to report transactions across all asset classes, rather than just derivatives. This requirement can be distilled down to a simple rule: "No LEI, no trade"—a succinct formulation used by Ron Jordan of the Depository Trust and Clearing Corporation.

While reporting requirements are undoubtedly tighter, the use of an LEI will help identify all parties to a transaction regardless of the broker-dealer or entity reporting to the regulator. One example of how the process works: If a firm trades with multiple broker-dealers, that firm will be reported with the same LEI —something that will help regulators better discern and assess systemic risk and determine whether concentrated risk exists within any entity.

The European Securities and Markets Authority (ESMA) has made clear that all market participants must take steps toward full compliance with LEI requirements under MiFID II. Based on prior experience with the adoption of the European Markets Infrastructure Regulation, ESMA is strongly encouraging reporting entities to focus on advance preparation—something that will reduce the possibilities of bottlenecks and backlogs and ensure that everyone is fully prepared for the new regulatory regime.

Who can request LEIs?

Any legal entity can apply for an LEI. Employees acting in a business capacity on behalf of a firm (or of a firm with a controlling interest over the entity being registered) are authorized to register for an LEI.
It's also possible to register for an LEI via a process called assisted registration. Under this scenario, a third party that is not associated with the entity being assigned the code can register for an LEI in the entity's name provided express permission to do so has been granted. Registered agents and compliance partners are typical choices for assisted registration.

Conclusion

Entities seeking to ensure a smooth transition to the new MiFID II regulatory regime should consider partnering with a trusted advisor who can assist with or facilitate the registration process.

Additionally, an advisor can help validate the data that's required to obtain LEIs (including GMEIs) and help maintain, update and renew important business records (name changes, mergers, liquidations, dissolutions, etc.).

By partnering with a trusted advisor and focusing on advance preparation, entities can navigate all technical and operational challenges and help ensure that all LEIs are in place before the upcoming January 3 deadline.

 

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