# LEI: Not a garland from Hawaii but a foundational risk management component   Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2021-01-25 Category: FINANCE Category URL: https://financedigest.com/category/finance Meta Title: Understanding Legal Entity Identifier (LEI) in Finance Meta Description: Learn about the importance of LEIs in financial transactions worldwide and how they benefit regulatory compliance, risk management, and client identification. URL: https://financedigest.com/lei-not-a-garland-from-hawaii-but-a-foundational-risk-management-componenthtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/untitled-design-2-1736838626611-compressed.jpg) _By **Peter Newton,** Managing Director and Eric Mueller, Strategic Netting Lead, D2 Legal Technology_ **What is a Legal Entity Identifier (LEI)?** Introduced under a mandate by the Financial Stability Board in November 2011 following the credit contraction of 2008, the LEI is a 20-character, alpha-numeric code based on the ISO 17442 standard developed by the International Organisation for Standardisation (ISO). It provides key reference information that seeks to create unique identification of [legal entities](https://www.financedigest.com/russian-central-bank-gives-legal-entities-green-light-to-trade-foreign-shares.html "Russian central bank gives legal entities green light to trade foreign shares") engaged in financial transactions anywhere in the world. Each LEI provides information about an entity’s ownership structure and enables financial [market participants](https://www.financedigest.com/powder-dispenser-market-market-2019-2029-where-should-participant-focus-to-gain-maximum-roi.html "Powder Dispenser Market Market (2019 – 2029) | Where Should Participant Focus To Gain Maximum ROI ") to understand ‘who is who’ and ‘who owns whom’. In essence, a publicly available LEI [data pool is a golden source](https://www.financedigest.com/exclusive-tiktok-nears-deal-with-oracle-to-store-its-data-sources.html "Exclusive-TikTok nears deal with Oracle to store its data-sources") reference library which is designed to provide transparency for all participants and certainty of who you are facing in transactions. New regulations have been introduced around the world over the past decade that mandate the use of LEIs when firms are transacting in the [Capital and Commodities markets and are required to provide reports to global](https://www.financedigest.com/be-simple-in-bank-capital-bank-of-england-tells-global-regulators.html "Be simple in bank capital, Bank of England tells global regulators") regulators and Trade Repositories. In the EU, these regulations include MiFID II and EMIR which require EU [firms to document trades](https://www.financedigest.com/dollar-firms-in-soft-holiday-trading-outlook-bullish.html "Dollar firms in soft holiday trading, outlook bullish") with the trading counterparty’s LEI.  Similar rules exist around the globe, such as the Dodd Frank regulation in the United States. From a regulatory perspective, LEIs provide a reliable entity identification data point, which is of [benefit to the transacting parties and to the market](https://www.financedigest.com/health-benefits-served-by-vegan-diet-will-infuses-vegan-noodles-market-demand.html "Health Benefits Served By Vegan Diet Will Infuses Vegan Noodles Market Demand") as a whole. While LEIs are mandated for trade reporting, the benefits of using LEIs as a key client identifier extend much further. Processes such as KYC, AML, [risk management](https://www.financedigest.com/strategies-banks-use-to-manage-liquidity-risk.html "Strategies Banks Use to Manage Liquidity Risk"), regulatory capital calculations, cross-border and conflicts compliance, to name but a few, can benefit from the use of LEIs to consistently and accurately identify clients and their associated risks. The [application of the use of LEIs integrated into each of these processes](https://www.financedigest.com/things-mortgage-lender-takes-into-account-when-processing-an-application.html "Things Mortgage Lender Takes Into Account When Processing an Application") has been slow. This is not surprising, as legacy systems, processes and databases are difficult and [time consuming](https://www.financedigest.com/adapting-payments-to-reassure-consumers-and-safeguard-profitability-during-times-of-uncertainty.html "Adapting payments to reassure consumers and safeguard profitability during times of uncertainty") to change. These challenges have been highlighted in the Bank for International Settlement (BIS) [April 2020 report](https://www.bis.org/bcbs/publ/d501.htm): “ _Progress in adopting the Principles for effective risk data aggregation and risk reporting”_. Of the 34 global systemically important [banks (G-SIBs), only five banks report](https://www.financedigest.com/credit-suisse-shares-hit-record-low-after-report-bank-is-looking-to-raise-cash.html "Credit Suisse shares hit record low after report bank is looking to raise cash") full compliance with the BCBS 239 data architecture and IT infrastructure principals. The report cites one of the principal challenges as “adapting to one single source for data [due](https://www.financedigest.com/amazons-twitch-hit-by-data-breach-due-to-configuration-error.html "Amazon’s Twitch hit by data breach due to configuration error") to the fragmentation of the data landscape.” Driving greater adoption of LEIs by accruing tangible benefits from their integration into firmwide data structures across lines of business and functions would improve client experiences, ensure more accurate [risk management](https://www.financedigest.com/improving-risk-management-in-the-insurance-industry.html "Improving risk management in the insurance industry") and better alignment with initiatives such as BCBS 239 and act as a foundation for cross functional data standards. Better handling, classification and management of the due diligence function of who you face is critical to the ability of firms to [unlock business value](https://www.financedigest.com/three-ways-data-unlocks-business-value-for-financial-organisations.html "Three Ways Data Unlocks Business Value for Financial Organisations ") and manage their businesses in an orderly and efficient manner. LEIs are a crucial foundation to a digitalised future, where resources such as capital, liquidity and collateral are optimised by financial institutions. In particular, prudentially [regulated](https://www.financedigest.com/uk-finance-regulators-should-pay-heed-to-energy-security-policy-says-sunak.html "UK finance regulators should pay heed to energy security policy, says Sunak") financial institutions continue today to struggle with counterparty data management for netting (and collateral enforceability) determination purposes. Unlike other areas of client data, the [due diligence](https://www.financedigest.com/why-due-diligence-is-so-important-for-direct-debit-customers.html "Why due diligence is so important for Direct Debit customers") continues to be undertaken by very senior in-house lawyers – ill-suited to such a high-volume operational task. Forward-thinking firms have started the journey to address this, with their legal functions providing the classification guidance, and moving the actual due diligence roles to operational client-onboarding teams, with some two-thirds of respondents to a recent D2LT [industry survey](https://www.financedigest.com/projector-lamps-market-surveys-opportunity-growth-and-forecast-by-end-use-industry-2021-2031.html "Projector Lamps Market Surveys, Opportunity, Growth and Forecast by End-use Industry 2021-2031") revealing this as a key direction of travel. Furthermore, they are keen to address this task as an industry – with the due diligence completed once per LEI – rather than by each prudentially [regulated firm](https://www.financedigest.com/evolving-ransomware-and-regulations-is-your-firm-ready.html "Evolving Ransomware and Regulations: Is your firm ready?"). This results in [reduced costs](https://www.financedigest.com/simple-ways-to-reduce-business-costs.html "Simple Ways to Reduce Business Costs") for the counterparty due diligence that needs to be conducted, by circa. 50%, allowing legal headcount to be redeployed on more technical matters of law with much greater value to the firm. This is a key step in re-imagining the legal [operating model of the future as well as reduced regulatory capital requirements and credit and legal risk](https://www.financedigest.com/mitigating-operational-risk-through-centralising-reconciliation.html "MITIGATING OPERATIONAL RISK THROUGH CENTRALISING RECONCILIATION"). LEIs and their subsequent classification (if treated correctly) solve a number of business-critical functions both at the point of origin/ ingestion and for use in downstream data sets and provide certainty about the entity type being faced and therefore the nature of business that can be transacted under close out netting legal opinions which act as an additional [risk management](https://www.financedigest.com/early-detection-of-mismatched-trades-is-key-to-managing-risk-and-maximizing-profits-on-the-pl-desk.html "EARLY DETECTION OF MISMATCHED TRADES IS KEY TO MANAGING RISK AND MAXIMIZING PROFITS ON THE P&L DESK") tool alongside Collateral in insolvency or bankruptcy situations. The regulator is seeking [greater transparency in markets and ways for firms to better risk](https://www.financedigest.com/brexit-the-risks-to-the-city-and-fintech-have-never-been-greater.html "BREXIT: THE RISKS TO THE CITY AND FINTECH HAVE NEVER BEEN GREATER") manage their positions; LEIs provide this level of comfort for both firms and regulators – a goal to be embraced to ensure financial stability. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---