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J.P. Morgan has become the first validation agent in the Global LEI System under the Global Legal Entity Identifier Foundation's (GLEIF) initiative aimed at easing regulatory compliance burdens.
A legal entity identifier (LEI) is a 20-character alphanumeric code that allows regulators to identify individual parties in a transaction.
More than 10 reporting or transparency regimes require an LEI in the EU and at least two-thirds of LEIs globally pertain to European Economic Area (EEA) entities. The US is the single market with the most LEIs.
However, SFT has revealed that more than 31 percent of globally issued LEIs are now ‘lapsed’, meaning their owner has failed to renew them annually, and this percentage is growing.
This is partly driven by the fact that owning an LEI to conduct certain transactions is regulatory mandated but renewing it, even if a firm is no longer engaging in that activity, is not.
The mounting pile of lapsed LEIs risks undermining the integrity of reporting data and entities in-scope for LEI-requiring regulations will increasingly fail in their reporting duties.
In response, the Financial Stability Board-backed foundation, based in Switzerland, unveiled a validation agent framework in September and called on global financial institutions to become part of the LEI issuing process.
The scheme is based on the understanding that banks are considered a trusted data source and seeks to leverage this by making it their responsibility to conduct company checks and then pass that validated data on to the LEI issuer as part of the LEI acquisition process.
Making banks validation agents would “simplify LEI issuance for their clients, reduce time-to-revenue, and future proof their institutions for digital innovation”, the foundation states.
In turn, GLEIF says becoming an agent enables banks to improve their customer experience, accelerate client lifecycle management and reduce costs by using ‘business-as-usual’ know-your-customer and anti-money laundering onboarding procedures to facilitate LEI issuance for their clients.
J.P. Morgan and LEI issuer, Business Entity Data (BED), a subsidiary of the Depository Trust & Clearing Corporation, are the first to answer the call and have together issued an LEI under the new validation agent model, via BED’s GMEI Utility service.
J.P. Morgan’s managing director, reference data strategy, George Brandman says: “Working as a validation agent will allow us to improve our client onboarding experience as well as create valuable industry LEI reference data.
“If a majority of financial institutions implemented this service, it would greatly multiply the number of LEIs in production to the benefit of all.”
Validation agents can additionally capitalise on new opportunities to add client value and achieve market differentiation, GLEIF says.
By expanding LEI issuance beyond clients that require an LEI for financial compliance, an agent can equip its whole business client base with globally recognised identities that can be leveraged in new services and across borders with any counterparty or supplier around the world, it adds.
Stephan Wolf, CEO of GLEIF, states: “Not only can J.P. Morgan streamline its client onboarding and lifecycle management processes, thereby improving its customer experience, it can also use the LEIs in innovative service offerings.”
“Increasing LEI volumes and broadening their usage will solve the issue of trust in financial transactions globally,” adds Wolf. “Validation agents like J.P. Morgan will play a key part in making this vision a reality. They contribute to growth across the entire financial ecosystem and ultimately will benefit all stakeholders and the broader global economy.”
Elsewhere, GLEIF has also introduced the concept of the conformity flag, which will act as an indicator of the accuracy of an LEI record and will highlight how well an entity’s LEI complies with overall conformity. When the flag is active the LEI is in full conformity.
The aim is to encourage LEI owners to keep them active and help indicate where one needs updating. In order to obtain a conformity flag, the LEI will undergo a series of checks against reporting criteria which will be published in the coming months. This is to be implemented during 2021, and in due course, it will be added to all LEI records.
Now read: ‘A closer look at lapsed LEIs’ in the latest issue of Securities Finance Times.
