This is the title of a circular issued on 17 November 2017 by the Malta Financial Services Authority to all market participants. This Global Legal Entity Identifier (LEI) System as it is known, is a G20 commitment and therefore a global initiative and not one aimed solely at EU member states. This title, which is also widely used in European union (EU) Markets in Financial Instruments Directive and Regulation (MiFID II/MiFIR) literature and articles, drives home two main messages. Firstly, that the regulator will seemingly not allow any exceptions, that is, it will not allow legal entities to trade without an LEI, and secondly, that it is solely the LEI that will be acceptable under MIFID II/MIFIR and that other entity identification numbers such as the local C-number issued by the Registry of Companies will not be a valid alternative as one may have initially thought some months ago.
MiFID II and MiFIR have necessitated the need for all legally independent entities to obtain an LEI. As of 3 January 2018, the new regulation comes into force and failure to hold a LEI will effectively block the ability of all such entities to trade in financial instruments on either regulated markets through a trading venue or otherwise, until such LEI is obtained.
This new obligation, according to regulators, is principally aimed at easing the identification of abusive market behaviours such as insider dealing and/or manipulation as a result of the requirement for all investment firms to report comprehensively on all deals conducted on behalf of investors so as to uniquely identify all parties to deals in financial instruments (shares, bonds, funds amongst others). The emphasis is clearly being placed on ‘identification’. As a result, it is felt by regulators that this effectively total transparency will render financial markets cleaner and safer.
In fact, in a 9 October 2017 press release, the European Securities and Markets Authority (ESMA) describes a LEI as follows: “The LEI is a 20-digit, alpha-numeric code that enables clear and unique identification of legal entities participating in financial transactions. It was developed, following the financial crisis, as a global system for the identification of legal entities. It has proven to be the most robust identification method for legal entities and as a result has been widely used by regulators in the European Union (EU) and globally. The LEI:
- is key to improving market surveillance and transparency; it also generates important benefits for businesses in terms of costs reduction, improved risk management and increased operational efficiencies;
- plays a key role in the new harmonised data-reporting regime under MiFID II and it is crucial to ensure the quality of the data reported to EU supervisors; and
- is important for firms to fulfil their reporting obligations under financial regulations. LEIs are also key for matching and aggregating market data both for transparency and regulatory purposes.”
The definition of ‘legal entity’ in very wide in scope and includes, amongst others, all companies (private or public), funds, trusts, sole traders and other bodies (including associations, foundations, charities etc).
Investment firms (stockbrokers, banks and other intermediaries) will therefore not be able to execute trades on behalf of these legal entities effective 3 January 2018 unless the LEI is provided to them for reporting purposes. As such, it is very important that entities act fast and obtain a LEI soonest.
Equally important is for companies seeking a listing of instruments (whether in Malta or elsewhere) to note that they would need to obtain a LEI prior to the listing date of the instruments concerned.
The application process is fairly straightforward. While there are no local issuers of LEI’s, a list of approved issuers is available from the website of the LEI Regulatory Oversight Committee here: https://www.leiroc.org/lei/how.htm. Local Operating Units (LOU’s) have been established and these enable the registration, validation and maintenance of reference data and issue LEI’s via online portals.
The Malta Stock Exchange (MSE) has also done its part and issued a notice to its members last week notifying that it has established contact with an accredited LOU and it is now available to act as facilitator for KDD Central Securities Clearing Corporation (https://www-en.kdd.si/). The process documented in this notice by the MSE is very easy to follow. There are two MSE forms (one for legal persons and one for funds) that investors or issuers can complete and forward by email together with an application fee of €92 as detailed therein (an annual renewal fee is also applicable). The form requires the details of the entity applying for the LEI and subsequently asks for details on the entity’s immediate parent company and ultimate parent company. Where the entity applying for a LEI is a standalone company, it will be sufficient to indicate so. The procedure is very similar when applying for the LEI online via one of the many other accredited LOUs.
The timing of the issuance of a LEI varies among LOUs but is generally expected to take a few days. However, a number of LOUs have also informed potential applicants in recent days that in view of the high demand ahead of the 3 January 2018 commencement date, they cannot guarantee the issuance of a LEI prior to this date and issuance may take a few weeks until the backlog is dealt with.
This new regulatory obligation is just one of a number of changes being introduced by MiFID II and MiFIR effective 3 January 2018 that will directly impact investors. In truth, this is possibly a relatively straightforward and a low impact one at that. Other changes are likely to have a more direct and far reaching impact on investors going forward and investors will need to be receptive to such regulatory changes as will no doubt be explained to them by their service providers in the coming weeks and months.
Given the extent of change that MiFID II and MiFIR will entail including in the way that intermediaries service investors going forward, it would perhaps not be such a bad idea for the regulators to embark on more frequent and direct information/education campaigns aimed at having as much of the investing community aware of the impact MiFID II / MiFIR will have on them. The extent of the changes coming through most definitely warrant increased information flow and not only from service providers.Print This Page Disclaimer
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