Understanding the Importance of LEI in the Financial Industry

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Understanding the Importance of LEI in the Financial Industry
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The number of companies that are being formulated is always growing by the day. This has largely been contributed by technological advancement and increased connectivity among businesses and individuals alike. To facilitate transparency in business transactions, the leaders of G20 agreed to formulate a system in which entities can be easily identified. Thus, they adopted a system known as Legal Entity Identifier (LEI), which uniquely distinguishes the companies that transact in the capital markets and on a global scale. LEI has now become a requirement for business operations in many jurisdictions.

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The LEI Number is a string of 20 characters based on ISO 17442, made up of three parts. Each segment carries a unique code that aids in identifying a particular organization. In 2013, the Regulatory Oversite Committee (ROC) took the responsibility of supervising the implementation and management of the global LEI system. Consequently, any company that is interested in operating in the financial markets is required to have a functional LEI number. Legal Entity Identifiers plays several crucial roles; they include concise regulatory reporting, operational efficiency, and database management system, among others.

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Companies That Require LEI

Businesses that want to acquire an LEI have to contact the relevant organization that issues them. The company would then be required to provide several vital information that includes the name, address, and country of formation. Additionally, the firm will also be required to provide the date when the initial LEI was issued and the latest details of LEI that were updated. Entities that can apply for LEI include sole proprietors, financial institutions, LLC, a limited company, branches of businesses that operate internationally, and any entity that is recognized to be legal by law.

Today, more than 1.5 million companies, trusts, and funds have active LEIs; regions including the EU, Canada, US, and the Asia Pacific are looking to enhance the implementation of LEI; this means that the number of companies that would have LEI is expected to rise.

The Structure of GLEIF

The Global LEI Foundation is a non-profit organization that is governed by the LEI Regulatory Oversight Committee (LEI ROC). The GLEIF ensures that there is integrity in the entire LEI system. It achieves this by ensuring that every information provided in the system is easily accessible and accurately reflects the identity of the business.

How Can Companies Benefit from LEI

Financial institutions usually face plenty of challenges when they deal with high-risk entities. The situation is normally heightened when the businesses that have borrowed a large sum of loans are outside the state or country. Without having a proper way of tracking the borrowers, banks run the risk of losing their money. However, Legal Entity Identifiers have made it easier for businesses that have such identification to borrow money from various financial institutions. Banks and credit rating agencies are now able to access crucial information that is freely available on the LEI database to gather information regarding their clients. Therefore, this greatly minimizes the risk of fraud since businesses can be easily traced.

What Makes the Use of LEI Efficient

There are a couple of factors that make the use of LEI efficient in the financial world; some of them include.

Singularity and Uniqueness

One of the attributes that make LEI efficient is the fact that every business possesses a unique identifying number that cannot be reused.

Neutrality

The LEI system was established with a pure and genuine motive of providing transparency in business transactions. Thus, the information available on the system cannot be used maliciously against the registered entities.

Free

Every information in the LEI database can be accessed freely by the public, a feature that has facilitated the transparency of cross-border transactions. This has ultimately reduced the level of fraudulent cases in business transactions.

Conclusion

The financial world has become very dynamic these days. Since there has been a significant increase in cross-border transactions that are business to business and business to consumers in nature, there needs to be a lot of transparency to facilitate the safety of trading activities. Legal entity Identifiers have brought a lot of sanity to the corporate industry by helping market participants to verify the validity of other entities. In conclusion, every business owner ought to consider acquiring an LEI for their firm to be deemed as compliant when trading on a regional or global scale.

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Ankur Shah is the founder of the Value Investing India Report, a leading independent, value oriented journal of the Indian financial markets. Ankur has more than eight years of equity research experience covering emerging markets, with a focus on India and South East Asia. He has worked as both a buy-side investment analyst for a global long/short equity hedge fund and a sell-side analyst for an emerging markets investment bank. Ankur is a graduate of Harvard Business School. You can learn more about his latest views on global markets at the Value Investing India Report. -- He can be emailed at [email protected]
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