MiFID II – Legal Entity Identifier
On 3 January 2018 the Markets in Financial Instruments Directive (2014/65/EU) and accompanying legislation (MiFID II) will come into force.
MiFID II is the EU legislation that regulates firms who provide services to clients linked to ‘financial instruments’ (shares, bonds, units in collective investment schemes and derivatives), and the venues where those instruments are traded.
In advance of this legislation, financial institutions have been asking certain clients to provide a legal entity identifier (LEI) so that they can fulfil their new transaction reporting obligations.
1. What is an LEI?
LEIs were introduced following the financial crisis of 2008, to help to reduce financial risk and increase awareness as to financial operators. The goal is that following implementation, all participants in the financial system would be easily identifiable in order to facilitate assessment and monitoring of financial stability.
A legal entity identifier or LEI is a 20-digit alphanumeric code which is specific to legal entities, which may include charities and other not for profit organisations.
When entities register for LEI, their number will form part of a maintained global database consisting of various information on the legal entities registered, which will facilitate assessment and monitoring of financial transactions worldwide.
As the LEI is internationally recognised and will be included on a global database, it is a useful way of identifying financial institutions and other entities for the purposes of reporting transactions.
It is already used for reporting obligations under the European Market Infrastructure Regulation (EMIR) which applies to entities entering into any form of derivative contract.
Beginning 3 January 2018, when MiFID II comes into force, it will thereafter be used for reporting obligations imposed on investment firms which execute transactions in financial instruments.
2. MiFID II requirements
MiFID II sets out various reporting and record-keeping obligations, one of which is a requirement for investment firms which execute transactions in financial instruments to report complete and accurate details of these transactions to the competent authority.
In a broad sense, the relevant transactions are those involving traded financial instruments. The key reason for this extensive record keeping is to allow regulators to more accurately police market integrity.
The detailed reporting rules set out that LEIs must be provided in the context of a relevant transaction for all entities involved in the transaction, (e.g. buyer, seller, entity executing the transaction and any transmitting entities). Such entities therefore will be asked by the reporting firm to provide an LEI so that the reporting obligations imposed on investment firms can be fulfilled.
3. Should your business have an LEI?
LEIs are available to legal entities, which here means a unique party which is legally or financially responsible for the performance of financial transactions or have the legal right in their jurisdiction to enter independently into legal contracts regardless of how they are constituted. This includes governmental bodies, supranationals, companies, unincorporated institutions, trusts and it is worth noting that there is no charitable exception but usually excludes natural persons.
However, eligibility for an LEI does not necessarily mean that an entity has to register for one. It may be the case that entities only register for an LEI because they are asked to provide an LEI by a financial institution which needs to fulfil reporting obligations under certain rules, for example EMIR or MIFID II.
In the UK, the FCA defines an LEI as ‘a unique identifier for persons that are legal entities or structures including companies, charities and trusts’.
If you own or manege a UK law firm offering services such as Private Client, Probate, Trusts and Estate Planning, you should be aware that this will likely affect your business.
In essence, the ramifications of this new requirement is that, from the point of MiFID II implementation (3 January 2018), financial institutions with whom your business may work (such as stock brokers and wealth managers) may no longer be able to provide investment services, including the disposal of shares, for clients who are in-scope legal entities and where an LEI is not on record.
For example, for the sale of shares arising from the administration of an estate, and where an agreement is with the solicitor, the financial broker would receive sales instructions from the solicitor. The broker will therefore need to report the solicitors as the ‘counterparty’ to the trade for which they will need the solicitor’s LEI.
In light of this, it is likely that such practices are in-scope legal entities and will be required to be registered with a LEI.
4. How do you obtain an LEI in the UK?
In the UK, the London Stock Exchange (LSE) issues LEIs. Applications can be made online, for which the name, address and certain supporting data and documents will need to be provided.
If you are a trust applicant (and not a bare trust) you are likely to need to provide the trust deed as part of the application, although for certain trusts which cannot disclose details the LSE may accept part of the trust deed as sufficient for the application.
There is an initial allocation cost of £115 + VAT and an annual maintenance cost of £70 + VAT. However discounts may be applied where firms make applications in bulk for over ten different entities. The LSE aims to turn around application in 1-3 working days.
Click here to find out more about allocation of LEI: https://www.lseg.com/LEI
Over the coming months we would expect that requests will continue to be made by investment firms and other financial institutions which may affect some of our clients. If you are aware that your entity does hold traded financial instruments, or derivatives or other instruments linked to traded financial instruments, it may be the case that you will be required to register for an LEI.
We have seen the demand for LEIs increase in two stages so far: firstly with the implementation of the EMIR reporting requirements and secondly with the incoming MiFID II transaction reporting requirements. The bigger picture here is of course the global trend of data gathering for the purposes of assessment and monitoring which is increasingly pervading the financial services sector in particular. The question now is whether we have reached a plateau in terms of data collection and reporting, or whether there is yet more to come.
If you require further information on anything covered in this briefing please contact one of Abrams’s specialist Financial Services advisers who will ensure that you receive the correct guidance on this issue.
PLEASE NOTE: This post is a general summary of the law and ought not be treated as legal advice for your particular circumstances.
bonds FCA Financial Services Financial Services Solicitor London Legal Entity Identifier LEI Markets in Financial Instruments Directive (2014/65/EU) MiFID II shares units in collective investment schemes and derivatives