27 June 2018

Speech by ESMA Executive Director Verena Ross on LEI at the Banque de France Conference

 Following the financial crisis, increasing transparency in financial markets became one of the key objectives of broader regulatory reform around the globe. MiFID II is one of the key pillars of these reforms for the EU financial markets and aims at improving transparency both for investors and regulators alike. To increase transparency, MiFID II established a brand-new reporting regime, which led to a significant amount of data being reported to regulators.

ESMA has built a system that receives roughly seven million records on financial instrument reference data per day. The system collects this information to support the national supervisors’ surveillance activities as well as for the transparency regime and the coordination of suspensions.

In addition, each national supervisor in the EU has built its own system to receive transaction data. This data needs to be combined with the reference data that ESMA receives. The transaction data contains information about each transaction including the LEI of the investment firms carrying out the transaction as well as their clients.

How do the rules around the LEI bring these key benefits to the European regulators and contribute to achieving the objectives of MIFID II?

First, the LEI is the only data element allowing a unique and persistent identification of clients of financial institutions. This identification is crucial to supporting regulators’ activities in the area of market abuse supervision.

Second, the LEI of the issuer is essential to determine which national authority is responsible for supervising relevant instruments such as bonds and related derivatives. For these instruments, MiFID II says that the responsible supervisor should be the one where the issuer is located even if the instrument is traded elsewhere.

Third, the LEI is needed to support our work on transparency, and in particular in the context of ESMA’s transparency calculations, which determine whether or not orders and/or transactions in financial instruments are subject to real-time transparency. In order to ensure that we classify an instrument correctly, and hence apply the correct transparency regime, we rely for some asset classes on the LEI.

Lastly, the LEI is also needed to supervise the correct reporting by financial services firms and to monitor positions in commodities derivatives under the MiFID II position limits and position managements controls regime.

For all these reasons, MiFID II introduces far-reaching LEI requirements. Specifically, the MIFID II rules have an impact on any entity issuing financial instruments traded on European trading venues. These are not only financial entities, but also corporates. EU investment firms and trading venues are obliged to report the LEI of all issuers regardless of where they are based and regardless of whether the entity is subject to LEI requirements in its own jurisdiction. This is logical, as all these entities are present in the EU financial markets and therefore the information needs to be collected for the reasons I just mentioned.

The MiFID II rules also mean that all clients of EU investment firms need to have an LEI. This has become known as the “no-LEI-no-TRADE” rule which prohibits EU firms to act on the instructions of a client who does not have an LEI. This means that the LEI code becomes a precondition for clients wishing to access the EU markets. Again this is important because it is only with this information being available that supervisors can conduct their market surveillance activity effectively.

There was a lot of concern expressed by market participants around the LEI and MiFID II implementation at the end of last year. With MiFID II having been in place for nearly six months, I believe that now is a good time to reflect on how things have gone and assess implementation.

Looking ahead to a few of ESMA’s priorities in this area for next year, I would like to mention two important pieces of legislation, which are expected to go-live in the summer of 2019: the Prospectus Regulation (PD) and the Securities and Financing Transactions Regulation (SFTR).

I will start with the prospectus regulation as it introduces rules on the identification of issuers of securities that are rather complementary to the MiFID II requirements. While under MiFID II it is the trading venue which is responsible for obtaining the LEI code of the issuer, the prospectus regulation and related LEI obligation directly applies to the issuer. From 21st July 2019, issuers will be required to include their LEI in prospectuses, the obligation applies regardless of whether the given issuer already has an LEI or not. It covers all issuers of securities, which seek admission to trading on a regulated market and offer securities to the public as defined in the Prospectus Regulation. Similar to MiFID II, the rules will apply to both EU and non-EU issuers.

In addition, the SFTR will mandate the LEI code for parties involved in securities financing transactions and their beneficiaries. The SFTR rules share many commonalities with the already existing EMIR reporting requirements. Under both regimes, the entities involved in such transactions must be identified with an LEI; these entities are the counterparties; the beneficiaries; the brokers; the CCPs and clearing members. In addition, under SFTR, the use of LEIs is further extended to the agent lender, the tri-party collateral provider, the CSD participant and the issuers of the securities. Overall, there are more than 20 fields where an LEI is required as entity identifier under the SFTR. This wide-spread use of LEI will also facilitate the EU and global aggregation of SFT data.

To conclude, I would like to emphasise that, while it requires some efforts at the beginning, the consistent use of the LEI across the various EU requirements also generates tangible benefits to the industry by reducing operational complexities, and, ultimately, decreasing compliance costs. Many stakeholders are now calling for the LEI to be the standard pan-European identifier that can be used for all regulatory purposes.

We fully acknowledge that there is a need for both the industry and the regulators to build on the progress achieved so far to further enhance data harmonisation through the LEI across the EU and beyond. Equally, we consider that international data standards should always be prioritised over local or proprietary solutions in order to foster this important objective.

Full speech

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