Legal Entity Identifier (LEI) dawns a new way to identify financial market participants

A recent post on the website talked about Legal Entity Identifier and what benefits it can bring to the financial sector players.

The LEI is a reference code to uniquely identify a legally distinct entity involved in financial transaction. On a global scale, there is lack of an identification system for legal entities across markets and jurisdictions. LEI comes as an effective tool for risk managers and regulators to identify parties in financial transactions.

LEI is a 20-digit identifier, much like a bar code, which is connected to basic information describing a company.

Developers in the field of financial technology can use LEI to write applications for analysis of companies and datasets. This would help in reducing cost of cross-referencing data by acting as key link for financial datasets. It would also be possible to create data quality applications for reference data. Developers will find it highly useful because it is free, open source and has no intellectual property restrictions. Applications can be designed to track complex hierarchies in corporations and holding companies.

The real challenge with the LEI is that many firms’ data organizations and their underlying technology platforms require having the same entity in several different data sets. A typical data infrastructure might include multiple customer, counter-party and security masters, all of which exist in different systems. In terms of security masters, customers that are also issuers will be duplicated in both the issuer master and the counter-party master. If the entity is also a customer, the same entity will appear in at least three or four different data sets.

At a time of financial crisis, it becomes difficult for financial regulators and private sector managers to assess the extent of market participants’ exposure to affected companies. It is also challenging to assess how vast network of market participants were connected to each other during such scenarios.

LEI system has gained value as a form of regulatory oversight in light of past financial crisis incidents. LEI is now finding use in swap data reporting which benefits public by providing financial stability.

LEI system brings a promise to facilitate micro-prudential and macro-prudential risk analysis, supervision and regulation; reduce cost for industry in collecting, cleaning and aggregating data and reporting to government regulators; reduce private firms’ operational risks and improve internal risk management and enhance industry’s market discipline.

Globally, around a dozen registrars have already issued more than 220,000 LEIs in 173 countries. Some major information and data vendors have also started incorporating LEI in their products.

GoldenSource, a global provider of enterprise data management (EDM) solutions, allows users to add LEI codes which is further incorporated into the EDM platform. London Stock Exchange has been issuing codes on individual basis via UnaVista, its hosted matching and reconciliation platform. This is helping the exchange is creating consolidated databases with avoidance of duplicates.