Regulators’ mixed messages on the requirement of legal entity identifiers (LEIs) for trade reporting are believed to be behind weak adoption of the 20-digit identity code.
The European Securities Market Authority (ESMA) has said the LEI or pre-LEI is not specifically required under the European market infrastructure regulation (EMIR), but the UK's Financial Conduct Authority has interpreted it differently, saying it may take a harsher line when counterparties do not comply with the LEI requirement.
Reemt Seibel, an ESMA spokesman, told theTRADEnews.com “some sort of identifiers are required throughout the standards for reporting purposes,” and often a different kind of identifier can be used.
ESMA’s EMIR technical standards state that if a LEI is not available, the trade report should instead include a pre-LEI or, if one of those is not available, a business identifier code.
Although ESMA has left the door open for other identifiers, the FCA has taken a stricter approach.
FCA spokesman Chris Hamilton said: “The EMIR technical standards states that an LEI or pre-LEI should be used where available. These are available to obtain and so they are required by law.”
He said the FCA has not mandated counterparties to stop trading with counterparties without an LEI. “Although as an LEI is required by law, we may have to take a harsher line where counterparties are not complying with the rules.”
The LEI is one of many initiatives that resulted from the financial crisis, aimed at allowing regulators to track counterparty entities and their activities. The Financial Stability Board’s regulatory oversight committee (ROC), which is comprised of global regulators, is responsible for the direction of the global LEI initiative.
ROC is still working on finalising the global system, but has endorsed more than 10 utilities, or pre-local operating units (LOUs), to date to issue pre-LEIs.
PJ Di Giammarino, CEO of regulatory think tank JWG, said that the LEI requirement stood in a regulatory grey area. As a result, when coupled with the high cost of adoption and issuing backlogs at pre-LOUs, there hasn’t been a huge uptake.
“Market participants need to know what the penalties are to make one decision or the other," he said. "The regulators need be very specific about wanting a single identifier. As it stands now the trade can continue and a variety of identifiers can be used.”
There are currently 215,562 pre-LEIs registered worldwide, of which 64,212 are in the US, 12,000 in the UK, 27,548 in Germany and 15,665 in France, according to LEI tracking service OpenLEIs. The number is significantly lower than industry expectations of around one million LEIs.
Mark Husler, CEO of trade repository UnaVista, a London Stock Exchange (LSE) company, which also runs a pre-LOU, admitted pre-LEI uptake has been low, but was optimistic.
“We are at the early stages, with LEIs only having been around for 12 to 24 months. And 10 years from now when we look back, I’m sure we’ll all agree that the LEI standard has been a very important step towards standardisation.”
Husler said the LSE had seen an increase in pre-LEI uptake over the past six months, issuing about 17,000 LEIs. “Obviously, there is still some way to go, but I expect the volume to continue to increase.”
Without the standardised identifier, it was “very challenging” for repositories and regulators to match trades and analyse systemic risk, Husler said, “making it difficult for the intent of EMIR to be delivered”.
As for why there has been a lack of pre-LEI registrations, Husler couldn’t say, as he believed there had been enough awareness in the industry in the lead up to the 12 February reporting deadline.
According to Di Giammarino however, LEIs could cost big firms millions of euros. JWG estimates the average price across pre-LOUs for registering an entity for a LEI is about €133, on top of additional costs associated with its maintenance. But JWG believes external registration only accounts for 20% of the internal cost.
LEI costs also include integration, updates and data quality management. Firms that have hundreds of LEIs to register could see significant costs mount up.
“There are plenty of things that are required under EMIR and a plethora of other regulations, so if you have limited budget you start looking to eliminate expenditure that is not expressly mandatory and with serious consequence,” Di Giammarino said.
“People start to think 'if I can live without it and it’s going to cost me money to get it, why would I get it now?'"