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Will MiFID II’s LEI rules mean more blocked trades?

John Mason
John Mason
Global Head Enterprise Middle and Back Office, Refinitiv

Financial institutions are under pressure to ensure clients have a Legal Entity Identifier (LEI) in order to meet MiFID II’s transaction reporting obligations.When MiFID II takes effect in January, financial institutions (FI) will need to be sure that clients who are eligible for an LEI have one before executing trades on their behalf.

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The LEI is a code unique to that legal entity or structure. When an LEI code is allocated, it is included in a global data system, enabling every legal entity or structure that is a party to a relevant financial transaction to be identified in any jurisdiction.

The LEI element of MiFID II’s transaction reporting obligations applies to financial instruments including shares, bonds, collective investment schemes, derivatives and emission allowances.

Risk management benefits

While LEI codes enable the unambiguous identification of entities, they also deliver a host of additional benefits relating to risk management, including, for example, improved transparency and visibility within global supply chains.

Enhanced market transparency clearly depends on a critical mass of adoption of LEI codes, and the requirements of MiFID II could conceivably double the number of LEIs that have been issued.

FIs subject to MiFID II will be required to identify clients using their LEI codes and include this information in transaction reporting.

UK Financial Conduct Authority quote

Reporting obligations

It is worth noting that the UK will still be a full member of the EU on MiFID II’s implementation date of 3 January 2018, and therefore UK FIs must also comply.

The ESMA technical and implementing standards on MiFID II request that member states ensure that LEIs are developed, attributed and maintained in accordance with internationally established principles.

It states: “Investment firms should obtain their clients’ LEIs from their clients before providing services which would trigger reporting obligations in respect of transactions effected on behalf of those clients.”

LEI balance sheets

Given this unfolding scenario and the fact that many institutions simply do not have a handle on which clients have LEI codes and which do not, many will turn to external providers for help.

LEI fact

Any investment firms who have yet to reconcile their LEI “balance sheets” should now treat this as a high priority activity, if they are to avoid the last minute rush at year end.

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