[...]The code, known as a Legal Entity Identifier (LEI), is a crucial part of policymakers’ efforts to track market abuse and monitor trading as part of Mifid II, which comes into effect on January 3. Policymakers have called it the biggest shake-up of European markets in a decade.
The eleventh-hour reprieve comes in response to rising concern that many investors could be locked out from deals because large parts of the market do not have an LEI. Until now, regulators have taken a tough “No LEI, no trade” stance on the Mifid rules. The FT reported last week that banks estimated as many as 20 per cent of their clients still did not have the necessary licence.
“No LEI, no trade was one of the things people were most worried about. There’s a long global queue for LEI numbers,” said Adrian Whelan, senior vice-president of regulatory intelligence at Brown Brothers Harriman, the US bank. “So it’s not unexpected, but it’s welcomed. It’s good to see some sensibility and pragmatism [coming from regulators].”
In recent months banks and trading venues have sought relief from the introduction the legislation, which is designed to give investors more protection and make markets more competitive and transparent.
Its scope, covering virtually all market activity, has left many market participants and some governments struggling to be ready. Earlier in the week Esma said that investors could still use markets in the 17 countries that had not fully put the Mifid II regulations into their own national laws.
The rules mandate that all market participants will need their own LEI — a unique 20-character alphanumeric code — to trade. To complete a trade, references for the buyer, seller and issuer are necessary.
Esma admitted that “not all investment firms will succeed in obtaining LEI codes from all their clients” ahead of the January deadline. Venues that traded instruments issued by non-EU companies were also affected, it said.
Banks and brokers will now be apply for an LEI on a client’s behalf in order to continue with trades, while trading venues could use their own codes for issuers who are based outside the EU and do not have one.
The UK’s Financial Conduct Authority, the region’s largest markets regulator, said it expected banks “to make every effort to secure a clients’ LEI before trading on their behalf.” Trading with missing LEI would likely constitute “a very small fraction” of total volumes, it said.
Some executives and lawyers doubted the grace period would work smoothly as banks and trading venues will now be responsible for gathering information from customers. Jake Green, regulation partner at law firm Ashurst said: “Many firms will actually find this of no help because they have built systems which will reject a trade where there is no LEI.”
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Statement on LEI implementation under MiFID II
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