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Significant gaps in legal entity identifier (LEI) coverage remain across major non-European markets and a further extension to the forbearance period beyond April is needed to avoid undermining reporting data integrity, a group of trade bodies are warning.
A 12-month grace period — starting with the go-live of the first and second phases of SFTR in April — was offered by the European Commission on the need to include third-country LEIs when it released the level-three SFTR text in January. The forbearance was granted in response to wide-spread concern that these counterparties had failed to organise their LEIs in time.
In early 2020, the hardline stance of the EU: ‘no LEI, no trade’, raised fears that the introduction of SFTR would inadvertently cut off unprepared third-country entities from the securities finance liquidity pool.
One year on, several industry associations say data from their members show that despite their own proactive efforts and several ongoing initiatives to boost LEI coverage by market infrastructures around the world they “are yet to see significant improvement in LEI coverage in these non-European Economic Area (EEA) jurisdictions”.
The International Securities Lending Association (ISLA) and the International Capital Market Association (ICMA) are among those now calling for the grace period, due to expire on 13 April, to be extended to “avoid unnecessary disruption” by allowing non-EEA issuers “significantly more time” to get their houses in order. A specific time frame was not offered.
In a joint letter addressed to UK and European national regulators and the EU’s market overseer, the associations argue that: “Within margin lending and securities lending activity, for which collateral is reported at a portfolio-level, a single missing LEI in the collateral pool will result in the rejection of the entire submission”.
The latest market survey of EU and non-EEA ISINs was conducted in February 2021 and included members of ISLA, ICMA, the AssociationAssocation française des marchés financiers and the Association for Financial Markets in Europe, in collaboration with IHS Markit.
The results were cross-referenced with several LEI-focused entities and found that of the 4,7570 unique ISINs identified, 37,207 (78.22 per cent) were missing LEIs.
Of those missing LEIs, 98 per cent (36,505) were for ISINs issued in non-EEA countries, most notably, the US (17,563), Japan (3,466), China (3,382), Canada (2,210), and South Korea (2,133).
In the face of this vast hole in the data coverage and vital role LEIs play in the SFTR trade reporting framework, the associations say allowing the grace period to lapse “risks undermining the success of SFTR reporting so far”.
At the time of the initial grace period, the European Securities and Markets Authority (ESMA) accompanied the confirmation with a firmly-worded warning that it expected agent lenders and tri-party agents that interact with third-country entities to ensure those counterparties are aware of the temporary nature of the rule change and that they are ready for the new 13 April 2021 deadline.
In this context, the trade bodies’ letter also offered some pragmatic alternatives to a further delay. These include the use of a dummy LEI where needed to avoid invalidating a reporting form or simply leaving the LEI field blank and knowingly causing the validation error.
The group notes that “each option will require an industry standard approach which may be difficult to attain prior to the end of the forbearance period”.
Moreover, they outline how, if the grace period is not extended, national regulators must steel themselves for an inevitable spike in the rate of SFTR report rejections which until now have been very low.
Now read: A closer look at lapsed LEIs
