On 2011, the Group of Twenty (G20) called on the Financial Stability Board to provide recommendations for a global legal entity identifier (“LEI”) and a supporting governance structure, which led to the development of the ‘Global LEI System’, through the issuance of LEIs, which now provides unique identification to legal entities participating in financial transactions globally. The operational integrity of the Global LEI System is ensured through services provided by Global Legal Entity Identifier Foundation (“GLEIF”), which is overseen by the LEI Regulatory Oversight Committee, comprising of representatives of public authorities operating across the globe.
The structure of the global LEI is determined in detail by ISO Standard 17442 and takes into account the stipulations of the Financial Stability Board. As defined in ISO 17442, the term ‘legal entity’ includes, but is not limited to, unique parties that are legally or financially responsible for the performance of financial transactions or have the legal right in their jurisdiction to enter independently into legal contracts, regardless of whether they are incorporated or constituted in some other way. It includes governmental organisations, supranationals and individuals when acting in business capacity, but excludes natural persons.
LEI is a global reference number that uniquely identifies every legal entity or structure that is party to a financial transaction, in any jurisdiction. The LEI is designed to enable the identification and linking of parties to financial transactions in order to manage counterparty risk. Its goal is to help improve the measuring and monitoring of systemic risk and support more cost-effective compliance with regulatory reporting requirements. It is important to distinguish between being eligible for a LEI code and being required to have one. As defined in ISO standard 17442, any legal entity that enters into a financial transaction is eligible for LEI, however any legal requirement to have a LEI will come from national financial regulators.
The Reserve Bank of India (“RBI”) has introduced the LEI system for (i) all participants (other than individuals) in Over the Counter markets for rupee interest rate, foreign currency and credit derivatives in India vide circular dated June 01, 2017bearing no. 2017RBI/2016-17/314 FMRD.FMID No.14/11.01.007/2-16-17 in a phased manner; (ii) large corporate borrowers of banks having total exposure of INR 50 crore and above vide circular dated November 2, 2017 bearing no. RBI/2017-18/82 DBR.No.BP.BC.92/21.04.048/2017-18; and (iii) participation in non-derivative markets vide circular dated November 29, 2018 bearing no.
RBI/2018-19/83 FMRD.FMID.No. 10/11.01.007/2018-19. Accordingly, all participants, other than individuals, undertaking transactions in the markets regulated by RBI viz., Government securities markets, money markets (markets for any instrument with a maturity of one year or less) and nonderivative forex markets (transactions that settle on or before the spot date) shall obtain LEI codes by the due dates indicated in the schedules attached to the aforesaid circulars issued by RBI. Only those entities that obtain an LEI code on or before the due dates applicable to them shall be able to undertake transactions in these financial markets after the due date, either as an issuer, an investor or as a seller and, or buyer.
It is pertinent to note that transactions undertaken on recognized stock exchanges are outside the purview of the LEI requirement. In case of nonderivative forex transactions, while all inter-bank transactions shall be subject to LEI requirement, client transactions shall require LEI code for transactions involving an amount equivalent to or exceeding USD one million or equivalent thereof in other currencies. Similarly, non-resident entities undertaking financial transactions in the relevant markets shall also require LEI code. Such entities that are not legal entities in their country of incorporation (e.g., funds operated by a non-resident parent/management company that are each registered as a Foreign Portfolio Investor) shall use the LEI code of the parent/management company. Subsequently, entities responsible for executing transactions, reporting or for depository functions in these markets shall capture the LEI code of the transacting participants in their systems.
A LEI code can be obtained from any of the local operating units (“LOUs”) accredited by the GLEIF, which is tasked with the implementation and use of LEI. In India, LEI code may be obtained from Legal Entity Identifier India Ltd. (“LEIL”), which has been recognised by the RBI as issuer of LEI under the Payment and Settlement Systems Act, 2007, as amended from time to time, and is accredited by GLEIF as the LOU in India for issuance and management of LEI. LEIL shall assign LEIs to any legal identity including but not limited to all intermediary institutions, banks, mutual funds, partnership companies, trusts, holdings, special purpose vehicles, asset management companies and all other institutions (excluding natural persons) being parties to financial transactions. LEI will be assigned on application from the legal entity and after due validation of data. For the registered legal entity, LEI will inter alia serve as a proof of identity for a financial entity, help to abide by regulatory requirements and facilitate transaction reporting to trade repositories.
The rules, procedure and documentation requirements including the process laid down for application, renewal and charges and fees that may be levied for renewal are to be ascertained from LEIL. After obtaining LEI code, entities should ensure that they are renewed as per GLEIF guidelines. Entities undertaking financial transactions shall ensure that their LEI code is considered current under the rules of the Global LEI System. Lapsed LEI codes shall be deemed invalid for transactions in markets regulated by RBI.
The implementation of LEI by RBI has been conceived as an essential step towards improving the quality and accuracy of financial data systems for better risk management in light of the Global Financial Crisis. Globally, the use of LEI has expanded beyond derivative reporting and it is being used in areas relating to banking, securities market, credit rating, market supervision, etc. LEI mechanism is expected to help banks effectively monitor debt exposure of corporate borrowers and enable banks in preventing multiple loans to companies against the same collateral. The benefits of generation of a wider business community are expected to grow in line with the rate of LEI adoption and regulation, which are yet to be discovered in due course of time.
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