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Filling in the LEI gaps for MiFID II advantage

John Mason

03 Nov 2017

Filling the gaps. Photography: Stefan Wermuth
Photography: Stefan Wermuth

The race to comply with MiFID II’s LEI transaction reporting rules is on. But instead of just filling in the gaps in their trading coverage, will firms be able to turn the data to their advantage?

With two months until MiFID II, regulated firms need to ensure they have in place Legal Entity Identifiers (LEI) for every client, counterparty and issuer they deal with.

As the industry mantra goes: No LEI, No Trade.

An emphatic statement, but one that some firms have yet to take on board in its entirety.

Find out how Thomson Reuters can help you prepare for MiFID II

Recent research by A-Team Group and sponsored by Thomson Reuters reflects this. Only 30% of respondents to a survey on attitudes to LEI 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.

Download report — Meeting Client and Counterparty Identifier Requirements Under MiFID II

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.

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.What are current client attitudes towards LEI registration?Download report — Meeting Client and Counterparty Identifier Requirements Under MiFID II

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

But the regulatory deadline — and the mantra — remain, despite recent pleas in some quarters for yet another delay.

Meeting the deadline

At many firms, the LEI has become one of several MiFID II work streams, and the majority have implemented an identifier solution for clients and counterparties.

Statistics from the A-Team Group survey show 64% of respondents mapping their existing internal database to LEIs, while the remainder have opted to use a third-party LEI consolidator.

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 Thomson Reuters can help you prepare for MiFID II

These include hotspots such as pre-trade reporting to Approved Publication Arrangements (APAs) and post-trade reporting to APAs and Approved Reporting Mechanisms, which have been identified by regulators as a key area where they expect to see compliance on deadline day.

The LEI is also critical to transaction reporting, meaning firms that want to trade on January 3, 2018 and avoid regulatory discontent must register for LEIs now.

A proactive approach

Whatever the mantra and potential market disruption that could be caused by a lack of LEIs, the emphasis now 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 Thomson Reuters LEI Profiling Service

These gaps, although identified, are causing concern, as firms don’t want to have to say ‘no’ to trading with clients without LEIs come January.

To avoid this, 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.How concewrned are you about the potential for a lack of preparedness to cause market disruption?Find out how Thomson Reuters can help you prepare for MiFID II

Regulators may offer a little leeway on MiFID II compliance issues that are new and not yet fully understood.

But there will likely be no forgiveness, and only penalties, for inaccurate transaction reporting, a function familiar to the industry for more than a decade.

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.

MiFID II could see the number of LEIs issued double to one million by early 2018 – Mark Davies, Thomson Reuters

Watch webinar – Managing entity data for MiFID II Compliance

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.

Access financial reference data, applications and solutions for MiFID II transaction reporting with Thomson Reuters

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.

Reviewing MiFID II and the Systematic Internaliser regime Buy-side innovation across the trade lifecycle TCA and FX best execution: Why now and how? Regulation in 2018: What’s your compliance approach? MiFID II: What you need to know before 3 January MiFID II: What makes our FX trading platform an MTF? MiFID II: European rules, global repercussions Regulatory reform is no barrier for Asia firms MiFID II countdown: Will markets be ready? Collaboration and the power of an open platform