LEI is short for Legal Entity Identifier and is a 20-digit alphanumeric code that is unique for each company, trust or charity that has one registered. The LEI was one of the several measures that was introduced under the EU directive MiFID II and is made to protect investors and improve transparency in global trading.
Any legal entity may register for LEI, in some cases it´s even necessary. All legal entities who make transactions in the securities market is required to have an active LEI code.
The purpose of LEI
The idea behind LEI is to make the global market more transparent. Since global trade increased in the 1900’s, a need for transparency in transactions and security in who you’re dealing with came about. The global market used to be quite complicated to navigate. Companies owned companies that were owned by other companies, and it made it hard to know who you were actually dealing with. This was an extensive problem and led to a whole lot of fraud cases and made it easy to hide transactions between organizations.
Following the 2008 market crash, thousands of funds were left unidentifiable and caused mass confusion. The lack of transparency put all the financial institutions in a position that was hard to solve. The issue was addressed at the G20 summit in 2011, who created the concept of LEI codes.
The idea was to create a system with confirmed identities of different legal entities in a digital database – with easy access and great reliability. Exactly what LEI codes are used for today.
How the system works
When a legal entity registers for an LEI code, it´s assigned with a 20-digit code. This makes them work as identification numbers. Each LEI is assigned by an approved local operating unit, a so-called LOU. The LEI code starts with four digits that identifies the LOU that has issued the code, followed by two zeros. After that follows a unique combination of 12 digits, representative for the legal entity that has registered for an LEI. This makes the LEI code work as an identification for all registered entities.
GLEIF is the organization that issue all LEI numbers, the LOU’s are just local subcontractors. GLEIF, Global Legal Entity Identifier Foundation, is also responsible for the functionality of the system and for monitorization of the LOU’s. The big LEI database, or index, also lies with GLEIF. In the database, it is possible for anyone to find out which legal entity is connected to which LEI code.
When LEI code is required
Since January in 2018, all legal entities who perform transaction in securities in the financial market is required to be registered for LEI. Securities involve stocks, bonds and options – basically any proof of ownership or debt with an assigned value. LEI is also required for companies listed on a stock exchange, as well as for entities in heavily regulated markets such as insurance and asset management. There are a number of mandates that state “no LEI no trade”, meaning if you don’t have an LEI number your trades will be blocked.
But since LEI comes with a number of benefits, more companies in the private sector are turning to LEI codes as well. Even though it´s not necessarily required. Having a registered LEI comes with extra security, a boost in credibility and an internationally recognized identity card.
How to get an LEI code
Another perk with LEI codes is that getting your business registered with an LEI code is neither complicated nor expensive. Applying for an LEI number can be done in a matter of minutes, regardless your entity type. First of all, you need to find a LOU or some other service that provide LEI code registration.
In order to register an LEI, you need to send in a LEI code application and complete payment. That´s really all you need to do I order to obtain an LEI, then you just wait for the confirmation that will usually be sent back to you within 12 hours. The application form contains questions about the legal entity you´re about to register, like which country it´s situated in and whether the company is owned by another company or not.
The cost for LEI code varies between LOU’s and other service providers. So, make sure to compare them before you register for LEI. Sometimes, you can even get a reduced price if you sign up for LEI over more than one year. If you do so, the service provider will make sure to renew your LEI each year. Otherwise, you need to do it yourself after one year in order to keep an active LEI code for your company.