ESMA's Latest Lei Statement Allows for Some Delay

On December 20th, 2017 ESMA issued a statement announcing steps intended to smooth the introduction of MiFID II’s legal entity identifier (LEI) requirements. Some of the news headlines regarding the statement might lead you to believe that all of MiFID II’s LEI requirements have been delayed six months, but that’s not the case. Additionally, the delayed requirements have conditions attached.

If you are actively involved in LEI data management or are working on MiFID II implementation, it’s worth reading ESMA’s brief, two-page statement.

Below we review why the statement was issued. More importantly, we highlight what has been delayed until July 3rd, 2018 and what will be enforced from January 3rd. We conclude with an explanation as to why we might see an increase in the issuance of duplicate LEIs and how that could create an issue for you.

Why now

The FT and others reported last week that some investment firms and trading venues were contacting regulators to advocate for an eleventh-hour delay. The regulators were swayed by their arguments: the LEI was created primarily to reduce risk, and it would be unwise to potentially disrupt markets by enforcing a mandatory requirement to use the LEI before markets are fully prepared.

What has been delayed

Two LEI requirements have been conditionally delayed six months:

No LEI, No Trade

Investment Firms will be allowed temporarily to transact with clients that don’t have an LEI under the condition that the investment firm obtains the necessary documentation from the client to apply for an LEI before commencing the transaction. Further, the investment firm is obliged to immediately apply for an LEI on the client’s behalf. Once the client’s LEI is issued, the investment firm must submit the corresponding transaction report.

LEIs for Non-EU Issuers in Financial Instrument Reference Data

Trading venues will also be allowed temporarily to use their own LEI in place of the LEI of a non-EU issuer if that issuer doesn’t have an LEI. The trading venue is obliged to then contact the non-EU issuer about obtaining an LEI.

For both of the above cases, ESMA and the relevant National Competent Authority (NCA) will monitor submissions, with attention given to their timeliness and frequency.

What has not been delayed

LEIs for EU Issuers in Financial Instrument Reference Data

The requirement for a trading venue to submit the LEI of an EU issuer in financial instrument reference data still goes into effect on January 3rd.

The statement notes that the failure to include the LEI of an EU issuer in reference data will be “considered a breach of reporting requirements by the trading venue under MAR and MiFIR and will be subject to appropriate supervisory action”.

Watch out for duplicates

The requirement that investment firms apply for an LEI on behalf of a client without an LEI may be a good way to ensure all clients get an LEI but increases the likelihood of two distinct LEIs being issued to the same legal entity.

For example, assume a client without an LEI trades with two different investment firms on January 3rd. Both investment firms then register an LEI for that same entity via two different LEI issuers. The global LEI system has mechanisms in place to detect duplicate registrations of this nature, but since the system is distributed it is possible for two LEIs for the same entity to be issued before the duplication is detected, especially if the registrations are made around the same time.

When the duplication is identified post-issuance, one LEI has its registration status set to DUPLICATE while the other retains the ISSUED status. There are currently over 2300 LEIs in the global system with a registration status of DUPLICATE, many of them issued in the run-up to derivatives reporting. So, this case has occurred relatively infrequently but is not a complete anomaly.

The marking of one of the two LEIs as a duplicate ensures that there is only one correct LEI used for the entity in the global LEI system. That’s the way it should be, but here’s something to be aware of: you will need to ensure you reference the remaining ISSUED LEI in regulatory reports, not the LEI marked as DUPLICATE. Your LEI mapping may need to be corrected.

LEI Smart proactively alerts customers when an LEI in one of their mappings is marked as DUPLICATE in the global LEI system and informs them of the correct LEI to use going forward.