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Compliance Management

LEI delay helps firms but the pressure is still on

John Mason

08 Jan 2018

On December 20, 2017, the European Securities and Markets Authority (ESMA) announced a six-month Legal Entity Identifiers (LEI) grace period, but firms must be in the process of obtaining client LEIs. You need the insight into your client’s LEI status to identify the gaps in your LEI universe.

Even with a six-month grace period, the pressure is still on and regulated firms need to ensure they are in the process of putting in place LEIs for every client, counterparty and issuer they deal with.

In a recent A-Team Group research report that we sponsored, only 30% of respondents said they had 75% to 99% of their entities of interest covered by LEIs.

Of more concern are the 23% with only 25% to 49% of entities covered by LEI, and the 7% with less than 25% of entities covered.

Lack of LEI awareness

Part of the challenge is a lack of awareness about the need for LEIs among organizations in non-EU jurisdictions transacting with firms within the MiFID II regime.

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A lack of clarity on which legal entities need to register for an LEI, particularly funds and trusts, has caused confusion.

More generally, the survey revealed a lack of urgency and a mistaken belief that lapsed LEIs will meet MiFID II requirements.

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To some extent, this is being addressed by firms extending their MiFID II LEI programs to encourage clients to register for the identifiers.

But some firms have not yet got to grips with MiFID II’s LEI requirements and are not aware of the need for the identifier in certain areas of the regulation.

Find out how we can help you prepare for MiFID II

A proactive approach

Whatever the mantra and potential market disruption that could be caused by a lack of LEIs, the emphasis now during this six months must be on filling any ‘LEI gaps’.

Some firms are taking a trading activity-based approach to this, reviewing trades over the past couple of years, checking that counterparties have an LEI, and trying to fill the gap if they don’t.

Others are taking a more holistic approach, reviewing existing LEI data sets against external sources such as the GLEIF’s Global LEI Index and other market data sources to spot any gaps.

Find out more about our LEI Profiling Service

Rather than leaving it to clients to get their entity data right, many firms are taking a proactive approach with outreach programs that help clients register for required LEIs.

Regulators are expected to take a proportionate and pragmatic view of MiFID II compliance in the beginning of 2018. However, with an already given six-month grace period, there will likely be little forgiveness for not meeting this new deadline.

Find out more about our LEI Profiling Service

Beyond compliance

Forthcoming regulations are expected to mandate LEIs where appropriate, but there is a fast-growing community of interest in using the LEI for business and operational purposes beyond regulation.

These include:

  • The use of LEIs to gain a consistent, enterprise-wide view of client data
  • The ability to support both regulatory processes of reporting and business requirements for entity tracking
  • The use of LEIs as a standard mapping and communications tool

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The addition of hierarchy data to LEIs by the GLEIF, and the development of entity hierarchy data by data vendors, offers opportunities to understand not only ‘who is who’, but also ‘who owns whom’.

This information is crucial to Anti-Money Laundering requirements, Know Your Customer and client on-boarding, and effective sanctions screening.

It can also provide a clearer picture of your clients and their relationships, and identify new business opportunities.

Best practice

Whether a firm is seeking to manage its LEI program strictly with regulatory compliance in mind, or is looking beyond this to drive business value, good practices start with quality data.

Many firms are outsourcing the maintenance of their LEI population to entity data vendors dedicated to delivering up-to-date and high-quality information that can be fed into client databases.

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Vendor services are automated to the greatest extent possible, with manual data search and validation kept to a minimum and usually used only to trace hard-to-find information.Firms working with a vendor partner and complete LEI data set are well placed to take a new approach to data aggregation for risk management, client engagement and business strategy.

Automation can reduce the time and money invested in in-house manual processes, releasing resources for revenue-generating projects.

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