Legal Entity Identifiers under MiFID II

October.19.2017

From 3 January 2018 all legal entities (no matter where they are based or incorporated) involved in buying, selling or issuing financial instruments on EU regulated markets, multilateral trading facilities or organised trading facilities will need to have and maintain a Legal Entity Identifier (or LEI) which will form part of a global database.

Issuers of financial instruments admitted to trading on an EU regulated market were required to have an LEI by 1 October 2017. This requirement applies to companies incorporated in non-EU countries (such as US companies or off-shore financing vehicles) that have bonds listed on EU regulated markets (such as on the Irish or Luxembourg Stock Exchanges).

The London Stock Exchange requires all companies with securities admitted to trading on AIM or other multilateral trading facilities (MTFs) to have an LEI. Any existing companies that have not registered for an LEI must do so by 30 November 2017.

These LEIs can be obtained from various issuers, including the London Stock Exchange. A substantial backlog may develop closer to the deadline, so we would advise entities to register for LEIs as soon as possible. We would be happy to assist you in obtaining an LEI – our contact information is included below.

Introduction

On 9 October 2017, the European Securities and Markets Authority ("ESMA") published a briefing aimed at highlighting the importance of legal entity identifiers, or "LEI"s, for compliance with the reporting obligations in the Markets in Financial Instruments Directive (2014/65/EU) ("MiFID II") and the Markets in Financial Instruments Regulation (EU/600/2014) ("MiFIR"). This note summarises these requirements and should assist you with determining whether you should obtain an LEI prior to the implementation of MiFID II and MiFIR on 3 January 2018.

What is an LEI?

A Legal Entity Identifier, or LEI, is a 20 digit alpha-numeric code specific to a particular legal entity and included in a global database. They are based on the ISO 17442 standard developed by the International Organisation for Standardization. The global LEI system was introduced following endorsement by the G-20 in 2012, and aims to facilitate the identification of entities and the worldwide monitoring of financial transactions.

The LEI initiative is part of the increasing global trend of data collection for the purposes of assessment and monitoring, which is particularly noticeable in the financial services sector. The provisions of MiFID II and MiFIR provide for a huge quantity of data to be reported to the relevant authorities to facilitate the monitoring of financial transactions and enforcement of regulation.

Why are LEIs needed?

Although the LEI system is used and recognised worldwide, in many jurisdictions LEIs are optional and/or only widely used for derivatives transactions. EU legislation has gradually required more entities to obtain an LEI over the last few years (for example, from 1 October 2017 all issuers of securities admitted to trading on EU regulated markets were required to have a LEI). MiFID II and MiFIR will greatly expand the requirement for LEIs, as all entities which are caught by the extensive transaction reporting requirements in MiFID II and MiFIR are required to have an LEI.

The MiFID II requirements are linked to the conduct of transactions in "financial instruments", which is a broad definition and includes transferable securities (such as shares), money market instruments, units in collective investment undertakings, commodity derivatives, contracts for difference and emissions allowances. The relevant financial instrument, or the underlying financial instrument (or underlying financial instruments making up a basket or index) must also be either admitted to trading on, or traded on, a "trading venue", which includes regulated markets, multilateral trading facilities ("MTF") and organised trading facilities ("OTF").

MTFs are multilateral systems operated by an investment firm or a market operator, connecting multiple third party buying and selling interests in a way that results in a contract. MTFs include the Nomura NX, the UBS MTF, AIM and the LMAX exchange in the UK.

OTFs are multilateral systems in which multiple third parties buying and selling interests in financial instruments are able to interact in the system in a way that produces a contract. OTFs include systems run by sell-side banks and brokerages.

It is important to note that the relevant transaction does not need to be conducted on the trading venue; merely the fact that the financial instrument is able to be traded on such a venue means that it will be caught. There is currently no definitive database setting out all the financial instruments to which these requirements apply, although various data vendors produce their own lists.

Who needs an LEI?

From 1 October 2017, all issuers of financial instruments which are admitted to trading on a regulated market were required to have an LEI. This includes companies incorporated in non-EU countries (such as US companies or off-shore financing vehicles) that have bonds listed on EU regulated markets (such as on the Irish or Luxembourg Stock Exchanges).

From 3 January 2018, all of the following legal entities will be required to have an LEI, regardless of where they are operating or legally based:

  • investment firms which execute transactions in financial instruments that are traded on a trading venue;
  • the underlying buyer and seller on whose behalf an investment firm executes transactions in financial instruments that are traded on a trading venue;
  • the underlying client of any firm not subject to MiFIR which trades financial instruments on a trading venue;
  • any person who makes a decision to acquire a financial instrument that is traded on a trading venue (such as an investment manager operating under a discretionary mandate);
  • any firm transmitting an order for the sale or purchase of financial instruments that are traded on a trading venue;
  • any entity which is required to submit a transaction report under MiFIR; and
  • the issuer of any financial instrument that is traded on a trading venue.

In many cases, trades cannot be completed without supplying the necessary LEIs.

ESMA emphasised in its 9 October 2017 release that it expects market participants to take all necessary steps to ensure full compliance with LEI requirements under MiFID II, and urged entities to obtain LEIs, as advance preparation will help in avoiding backlogs.

On 13 October 2017 the London Stock Exchange ("LSE") published Market Notice N07/17 and AIM Notice 47 which stated that all companies with securities admitted to trading on its regulated markets and MTFs (including AIM) are required to have an LEI. If an existing regulated market issuer has not registered for an LEI, it must do so immediately. Other issuers (including AIM companies) must do so by 30 November 2017. The AIM application form for admission of new securities to trading on AIM has been amended to require an LEI.

How do you get a LEI?

You can find a list of LEI issues on the Global LEI Foundation website. An entity can obtain an LEI from any issuer and not just those based in its home country. In the UK, an LEI can be obtained from the LSE for an allocation fee of £115 plus VAT. LEIs are generally available within 1-3 working days of the complete application being made.

An entity's LEI is permanent. However, LEIs must be renewed annually, at a cost of £70 plus VAT (where the LSE is the LEI issuer).

The LEIs and their associated reference data (including the entity's official name, country of formation, legal form, registered office address, headquarters address and local jurisdictional registration details) are publicly available.

For more information or assistance with obtaining an LEI, please contact Katie Cotton, Nell Scott or Jacqui Hatfield.