FSCA: implementation of legal entity identifiers (LEIs) and new peer review

On Monday this week the Financial Sector Conduct Authority (FSCA) reported that the Financial Stability Board (FSB) has published a peer review (Thematic Review on Implementation of the Legal Entity Identifier), for implementation of the Legal Entity Identifier (LEI) around the world. The LEI, a global standard, is intended to enhance the management of information across legal entities, facilitate an assessment of risk exposures at the global consolidated level and improve the speed at which information is available to both legal entities and supervisors.

A LEI is a 20-character, alpha-numeric code that was introduced following the financial crisis of 2008 to be adopted globally, to uniquely identify legally distinct entities that engage in financial transactions

• Since its endorsement by the G20 in 2012, the LEI system has been successfully brought into operation with over 1.4 million entities uniquely identified by a LEI in more than 200 countries.
• Most FSB jurisdictions implementing rules mandating LEI use in at least one area.
• Adoption has been most successful when the LEI has been mandated as part of an international effort.
• The LEI is used by authorities for various regulatory tasks.
• Several financial institutions and trade associations have called on authorities to mandate the use (and renewal by entities) of the LEI, both to facilitate regulatory reporting and to increase the efficiency and lower the costs of customer identification, transaction processing and data aggregation.
• Notwithstanding this progress, the LEI has far to go to meet the G20’s objective. LEI adoption remains uneven, particularly outside securities and derivatives markets, which limits the ability to effectively support many regulatory uses or to capture positive externalities and maximise network effects.

Several financial institutions and trade associations have called for the mandating of LEI use, citing the need to increase efficiency and lower costs of customer identification, transaction processing and data aggregation.

The review also announces recommendations to improve LEI adoption, some of them including:

• The use of LEIs for the identification of all legal entities in the data reported to trade repositories for OTC derivatives as part of the Unique Trade Identifier (UTI)
• Consider the mandatory the use of the LEI for the identification of a wider set of financial market participants, their infrastructures, counterparties, and related (especially in a cross-border context)
• Promote LEI adoption through a nationwide implementation strategies to maximise the cross-sectoral benefits of the LEI

For a full view of the LEI adoption progress to date, as well as a breakdown of the entire peer review released last week, please refer to this document prepared by the FSCA.

 

The global Legal Entity Identifier (LEI) initiative was introduced by the Financial Stability Board (FSB) and the Group of Twenty (G20) following the global financial crisis of 2008, to create a method that will ensure that all participants and financial institutions/legal entities in the financial system would be easily identifiable in order to facilitate the assessment and monitoring of financial stability.

The FSCA has been part of some noteworthy developments regarding the implementation of LEIs in South Africa:

1. Strate (Pty) Ltd was fully accredited as an Local Operating Unit 2 by the GLEIF Accreditation team and has been issuing LEIs since 2016.
2. In South Africa the use of LEI’s by OTC Derivatives Providers to report transactions to a Trade Repository was mandated in Conduct Standard 3 of 2018: Reporting obligations in respect of transactions in over-the counter derivatives which was published on 11 October 2018.c) A discussion paper on the implementation 3of LEIs was issued by the FSCA during November 2018, with the aim of promoting awareness of the global use of Legal Entity Identifiers (LEIs), and seek feedback from the market on the proposals for the implementation of LEIs. Positive comments were received from the GLEIF as well as industry and there was general support for the LEI initiative as well as the following projects for LEI implementation that were proposed by the FSCA as a first phase, namely:
   
   1. As part of the policies identified by the Financial Stability Board (FSB) to increase transparency across Securities Financing Transactions (SFTs), the FSCA is in the process of drafting conduct standards for the SFT market in South Africa. It is envisaged that in the reporting of SFT transactions an LEI will be required.
   2. It is envisaged that a reporting and disclosure framework for short sale transactions will be implemented in due course and the use of an LEI when reporting short-sale transactions is currently being considered.