04 February 2020

FSB: The value of the LEI for identification in digital processes

Klaas Knot outlined the background to the Legal Entity Identifier (LEI), and described the valuable role it can play in managing financial risks and enhancing the quality and accuracy of financial data. Mr Knot also emphasised how authorities and market participants alike can reap the benefits of more widespread adoption of the LEI.

Like many other regulatory innovations, the LEI was born out of the global financial crisis. The years leading up to the crisis saw a diverse range of legal entities trading on financial markets. Many of them were also part of much larger firms, even though this was not always clear. These financial conglomerates combined many different structures and activities. And they operated across many different jurisdictions. But they also lacked transparency and stability. Lehman Brothers was a prime example of this: a patchwork of cross-border and cross-entity interdependencies. Lehman’s insolvency resulted in over seventy-five separate bankruptcy proceedings. When it collapsed, the group was party to over nine hundred thousand derivatives contracts. When the crisis hit, it was unclear which party owed what to whom. The resulting insecurity caused even more panic on the financial markets. The root of the problem was the large number of legal entities, scattered across the world, with no uniform international method of identification.

The LEI was therefore introduced to address this problem and in 2012, the G20 endorsed the LEI System as a global standard. The objective of the G20 is the “global adoption of the LEI to support authorities and market participants in identifying and managing financial risks”. Since it was introduced, over 1.5 million entities in over 200 countries have registered for an LEI. The LEI has seen widespread adoption in several financial markets most notably in the over-the-counter derivatives markets. It is also used increasingly in the issuance of debt and equity securities in jurisdictions. In other areas, the uptake of the LEI is less widespread, and the FSB continues to monitor this progress. In line with the G20 recommendations, the FSB is a strong supporter for a broader uptake of the LEI. The LEI has helped to make the financial system safer. Authorities can use it for many different regulatory purposes. They can for example use the LEI to monitor financial risk, to keep track of financial entities’ aggregate risk exposure, for resolution planning. A good example is embedding the LEI in the data on derivative contracts reported by trade repositories. This is very helpful in giving supervisors a clear picture of what is going on.

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