What do you mean by LEI?
The Legal Entity Identifier (LEI) is an identification code, similar to a bar code, that is used to uniquely identify a legally separate entity that engages in a financial transaction across markets and jurisdictions. The LEI is intended to be a cornerstone for financial data – the first worldwide and unique entity identifier that allows risk managers and regulators to promptly and accurately identify participants in financial transactions. For instance, a big worldwide bank may have an LEI identifying the parent entity as well as an LEI for each of its legal companies that purchase or sell stocks, bonds, swaps, or engage in other financial market operations.
Why do we need the LEI services?
When Lehman Brothers went bankrupt in September 2008, authorities and private-sector organizations were unable to identify the scope of market participants’ exposure to Lehman and how the broad network of market players was connected promptly and completely. The financial crisis highlighted the need for a worldwide system to identify financial relationships for regulators and private-sector organizations to better comprehend the real extent of risk exposures throughout the financial system.
The creation of the global LEI system is a tremendous accomplishment that addresses these weaknesses while also providing important, long-term advantages to the public and private sectors.
The adoption of the global LEI by the financial industry means that data reported to regulators and used internally for risk management will be more uniform and accessible. This will assist authorities in better analyzing and monitoring the financial system’s stability and dangers. This will also allow businesses to enhance internal risk management and reduce expenses associated with data collection, cleansing, and aggregation, as well as data reporting to authorities.
The United States is governed by a plethora of rules that need the LEI for transaction reporting. The Dodd-Frank Act, the Commodity Exchange Act (CEA), and the MiFID II directive, which applies to US corporations dealing with the EU, are examples of such laws. As a result, the US financial services industry is home to almost 14% of the world’s LEIs. As a result, the United States is the world’s largest user of the LEI. The LEI is primarily used by legal entities engaging in financial transactions or working inside financial systems. As a result, if your US firm is trading in the global financial system, you will almost certainly need to get an LEI number.
At present time, LLCs and sole proprietorships in the United States may not be legally obliged to get an LEI. However, there are several advantages to obtaining an LEI number. It serves as a globally recognized identity card and increases your company’s reputation. And, because the LEI is increasingly becoming a global standard, it’s a smart idea to have one before you need one. find more info here.
Conclusion
As the global LEI becomes more extensively utilized, it is expected to reduce costs and enhance risk management for individual enterprises and the financial system as a whole. These savings will be realized through reduced transaction failures, data reconciliation, cleansing, and aggregation expenses, and regulatory reporting costs.
A worldwide LEI system will assist organizations in the long run by clearly identifying their counterparties — the firms with which they deal — and the consumers they serve, making internal risk management easier.