Nothing brought the need for a global system to identify legal entities behind financial transactions home more than the 2008 global financial crisis. Since then, 184 international regulators have embedded LEI into their rules for reporting and compliance.
Having an LEI brings huge benefits to the companies that participate in regulated financial markets. Here are 8 key ones:
1. Increased Transparency
Having an LEI provides a clear and unique identifier that makes it easier to identify counterparties in global financial transactions which you can find on VLEI’s website. The LEI code connects to a publicly available database of standardized information that can answer the questions, “who is who” and “who owns whom.”
Transparency in the world of business is key to building trust with customers and partners. It’s also necessary for compliance with government regulations and streamlining financial transactions. The LEI is a step in the right direction towards increased transparency in the financial industry.
The need for a globally consistent system to uniquely identify legal entities emerged as a result of the 2008 global financial crisis, when the collapse of Lehman Brothers highlighted the difficulties in identifying the connections between market participants. With the LEI, regulators and private-sector firms can consistently determine parties to financial transactions on a global basis. In addition, the LEI enables a common, standardized data pool that can provide more detailed information about an entity’s relationships and connections, including its corporate hierarchy (across all jurisdictions). This level of detail is not currently included in other global identifier systems, such as SIC codes or ISINs.
2. Streamlined Transactions
A key benefit of having an LEI is the ease with which it streamlines payments. The unified LEI database reduces the time it takes to match trade details between counterparties, and to confirm them at settlement. Additionally, it helps to improve the accuracy of payment-related data and lowers counterparty risk by allowing for more efficient KYC processes, as well as account-to-account owner verification.
A 20 digit alpha-numeric code, the LEI is similar to a barcode or a digital passport and is used to identify participants in regulated financial transactions and markets. A global reference system that allows for easy tracing of legal entities, the LEI was established as a result of the financial crisis, and is rapidly being adopted across jurisdictions.
With its high level of transparency and streamlined transaction processing, obtaining an LEI is an essential step for any company looking to expand into international business. LEIs are also required by many regulations, including Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. In addition, banks and other financial institutions have started adding an LEI check to their KYC standards, as this process is quicker and less expensive than traditional validation methods.
3. Better Compliance
The LEI makes it much easier for financial institutions to identify and validate the identity of entities on both sides of a transaction. This makes it easier to comply with government regulations and prevent money laundering activities. The LEI is a unique 20-digit code that contains important reference information about the structure and connections of legal entities participating in financial transactions.
The global tracing system that the LEI creates can also help to reduce costs associated with compliance processes, particularly KYC (know your customer) procedures. It can be costly and laborious to match up names with a wide range of watch lists, databases and other reference data. The LEI enables a shift from name-based matching to identity-based processing and reduces these costs significantly.
The LEI is a critical tool for streamlining the flow of information in global markets and improving transparency across financial systems. By enabling regulators, investors and risk managers to instantly identify the counterparties involved in a transaction, the LEI helps reduce fraud and market disruptions. It also improves regulatory oversight and streamlines financial transaction reporting by making it easier for authorities to see the big picture.
4. Reduced Risk
When it comes to identifying clients, KYC due diligence and transaction verification, the use of LEIs makes for more reliable and faster processes. As a global standard, LEIs ensure consistency across different markets and reduce the potential for mistakes that can happen when using multiple local identifiers.
The LEI is based on public data and offers a single, centralized, free to use database of legal entity information. This gives more transparency for all market participants by allowing the reporting of Level 2 information (parent structure), which can help to reveal networks of control and ownership that may not otherwise be visible.
It also makes it easier for banks to confirm the identity of a client and avoid potential fraud. This is especially important in cross-border transactions, where it can be difficult to determine the actual location of a business. In addition, the LEI can be used to streamline payment messaging and reduce the time and expense of resolving disputes. The system is being supported by regulators around the world, including the CFTC and SEC in the United States.
5. Increased Revenue
The global LEI system is funded by registration fees and an annual renewal fee paid to local operating units (LOUs). These LOUs then share a portion of the funds with the global LEI Foundation, which ensures that the system remains open and consistent.
This global network makes it easier to understand the structure and connections of legal entities that are participating in financial transactions. This improved transparency helps reduce risk in the financial markets and supports robust government oversight.
In addition to facilitating more efficient due diligence, the use of an LEI allows firms to easily match and confirm trade details with counterparties, reducing operational costs and time spent on data reconciliation. According to a study by McKinsey, this could save banks two to four billion dollars annually in KYC processes alone.
In the aftermath of the 2008 market crash, the leaders of the world’s largest economies agreed to create a global solution to legally identify entities involved in financial transactions. The resulting LEI code is a simple solution to a complex problem that brings trust, security and efficiency to the global marketplace.
6. Increased Customer Trust
After the 2008 market crash it became apparent that the lack of transparency in financial transactions was a major issue. The G20 and FSB worked together to create the LEI to address this problem. The LEI is a global reference system that enables worldwide tracing of legal entities through standardized information and a central database.
The LEI helps companies become more efficient at internal reporting and risk management, by reducing data collection, matching, aggregation and reporting costs. It also reduces the potential for duplicate or inconsistent identifiers to exist across different systems and databases. It is estimated that universal LEI adoption could cut costs for the financial industry by up to 2-4 billion dollars annually through improvements in KYC processes and reduction of transaction failures and costs associated with manually matching and aggregating financial data.
Investing in an LEI is the right move for any business that transacts globally. A good provider will offer an easy system to register, renew and manage an LEI, as well as a dashboard that makes it simple to stay on the ‘LEI Happy Path’.
7. Streamlined Onboarding
As the LEI becomes a global standard for identifying market participants, financial institutions are integrating it into their onboarding processes. This saves time by eliminating the need to verify a company’s information manually and reduces costs by reducing the number of errors.
The LEI also provides a unique and standardized global database that can be used to easily identify the legal entities behind the counterparties in financial transactions. It connects key reference data and enables regulators and market participants to immediately see who they are dealing with. This was a key recommendation in the aftermath of the financial crisis and could help prevent another collapse on a larger scale.
Many countries, including the US and EU, now require an LEI code for any legal entity trading or operating within their markets. This makes it easier to comply with regulation and prevents trades from being blocked when a legal entity doesn’t have an LEI. For this reason, it’s important to renew your LEI every year to ensure you continue to have accurate public data.
8. Reduced Compliance Costs
Nowhere was the need for a globally-standardized ID more apparent than in the aftermath of the global financial crisis. Prior to the LEI, regulators struggled to track connections and exposures across the financial system.
They had to manually match names and use a variety of code systems. This led to high costs, low efficiency and a lack of accuracy. The LEI solves this problem. It enables regulators to have a single, centralized database of market participants that is accurate and easily accessible.
Using the LEI, regulators can better understand how businesses interact with their markets and each other, thereby improving their ability to detect suspicious activity and criminal networks. The standardized information and global reference system also make it easier for businesses to comply with cross-border regulations, such as those related to anti-money laundering and countering the financing of terrorism. This is a major benefit that can have far-reaching implications beyond swaps, including home mortgages and other consumer credit products. Regulatory bodies are beginning to mandate the use of the LEI and other forms of global ID, and businesses are voluntarily adopting them.
