Stephan Wolf, CEO of the Global Legal Entity Identifier Foundation, speaks to Carmella Haswell on the trials and tribulations of its universal project to onboard validation agents in preparing securities finance markets for upcoming LEI legislation
An initiative to ease regulatory compliance has resurfaced around the globe since it began in the fourth quarter of 2020. The Global Legal Entity Identifier Foundation (GLEIF) recently welcomed its first Legal Entity Identifier (LEI) validation agent in India — risk management and monitoring platform Rubix Data Sciences — after already onboarding validation agents in North America, Europe, Africa and China.
GLEIF, the Financial Stability Board-backed foundation based in Switzerland, introduced a validation agent framework in September 2020 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 conducting company checks, and passing that validated data on to the LEI issuer as part of the LEI acquisition process.
LEI issuers will leverage know-your-customer (KYC) and anti-money laundering (AML) procedures to aid clients in obtaining an LEI, in line with increasing mandates from regulators, including the Reserve Bank of India, the Securities and Exchange Board of India, and the Insurance Regulatory and Development Authority of India. All three institutions have mandated LEI usage across over-the-counter derivatives, credit borrowing, large-value payments, insurance and cross-border transactions.
A world-wide search
An LEI is a 20-character alphanumeric code that allows regulators to identify individual parties in a transaction. The Securities Financing Transactions Regulation (SFTR) will introduce a requirement for LEIs to be correctly indicated in transaction reports, irrespective of the location of the counterparties, the issuers of securities or the rest of the participants to an SFT, and regardless of whether these entities are subject to LEI requirements in their own jurisdictions.
Stephan Wolf, CEO of GLEIF, indicates a rapidly changing concept in the financial landscape, where participants are realising the value of the LEI. For instance, when participating in international trade, an LEI acts as a business’ international passport. He says: “The Global Financial Crisis was a major point in time when the world was united. Regulators across the world mandated the LEI for counterparties in derivative trades. However, some regulators have been hesitant to enforce stricter entity identification, because the financial crisis did not originate in their country.”
Observing the adoption of LEIs over each quarter, Wolf notes India and China are countries which consistently uphold the highest LEI growth rates. “The reason is not to protect the global financial market,” he says, “but to support their organisations in the import and export of physical and digital goods. The use of the LEI in this way is now a major trend that we are pleased to see.” To support this momentum, GLEIF has appointed representatives in Japan, Singapore, India and China to work with local authorities and businesses to further encourage LEI adoption in these regions.
However, the road to onboarding validation agents to assist these adoption efforts has not been an easy ride. Two of the main barriers facing GLEIF in their mission include contacts and publicity.
“It can be difficult for us to find the right people within a bank to start the process of becoming a validation agent. In cases where we have seen success, it happens that we know the people responsible for entity record management. But at other large financial institutions, it is not always clear,” Wolf explains. “That is a challenge — first finding the right people and then contacting them, convincing them and showing them the potential benefits.”
Despite these constraints, a McKinsey study has proven helpful in this quest to onboard validation agents, highlighting how banks could save US$650 million annually by encouraging broader global adoption of LEIs.
In terms of publicity, Wolf notes that there is an issue with validation agents speaking openly about their work. He adds: “Unfortunately, banks are very private and do not want to overtly share their processes. We have validation agents, large organisations that are already operational, who do not allow us to mention them publicly, because banks fear that it would expose their client base.
“For example, if you had an uptick of 50,000 LEIs a day, and at the same time, announce the onboarding of a large bank to the programme, people could make the connection.”
Attaining the international passport
Currently, SFTR regulation is accepting reports without the LEI of third-country issuers of securities which are lent, borrowed or provided as collateral in an SFT. The European Securities and Markets Authority (ESMA) expects national competent authorities to avoid supervisory actions in relation to reporting of LEIs of third-country issuers until 10 October 2022, after an 18-month extension.
The Financial Conduct Authority (FCA) has also offered an extension on these reporting demands, to align more closely with ESMA’s deadline. The original deadline for UK SFTR was 13 April 2021, which was extended by 12 months to April 2022. However, the FCA has further extended this by another six months, delaying reporting until 13 October 2022.
The need for the extensions was to avoid market disruption after large gaps remained in LEI coverage outside of the European Economic Area. Previously, there were concerns that companies in smaller countries might have an issue in obtaining an LEI. In response, GLEIF ran a research study with the Asian Development Bank to assess whether large and small companies in developing countries — including Bangladesh, Cambodia, Samoa and Mongolia — could acquire an LEI relatively easily and at reasonable cost.
The report found that it was ‘a breeze’ to obtain an LEI in each of the listed countries, where multiple LEI issuers are available to help. Of those surveyed, 87 per cent of participants rated the LEI registration process as ‘very easy’, ‘easy’ or ‘average’. The study also disclosed that 65 per cent of participants paid US$75 or less to acquire an LEI.
Difficulties were found, however, with small and medium sized enterprises (SMEs) entering international markets. The barrier was discussed by co-founder and CEO of Rubix Data Sciences Mohan Ramaswamy, in the wake of Rubix Data Sciences becoming a validation agent in India. Speaking to SFT, Wolf explains that SMEs, which make up 90 per cent of businesses globally, struggle to access finance, form partnerships and trade overseas if they are unable to prove their identity.
“This is particularly difficult for SMEs in developing markets, where they may be perceived to be higher risk by potential partners. Banks are prohibited from offering them trade finance without undergoing painstaking and costly KYC and AML checks — processes which are hampered without a verified identifier,” notes Wolf.
He continues: “An LEI enables SMEs to apply for trade finance and establish contractual, regulated agreements with banks, payments networks and trading partners.”
The next chapter
Forecasting which route this standard of practice on LEIs is heading, Wolf anticipates a broad pick up from the US, Canada, Mexico and the far East, with advancements being made in Asia, India and China.
Using the American Customs and Border Patrol as an example of greater LEI adoption, Wolf says that the government organisation has launched a project to test the use of LEI as a business identifier for import and export customs declarations. “This is a completely new use case for the LEI and could lead to a significant increase in its adoption should every exporter to the US require one,” says Wolf.
This theme can also be seen in China, which has walked a similar route in mandating LEIs for several countries, according to Wolf. He notes that Europe is ‘well covered’ with work still being done across the region to increase its adoption, such as the European Banking Association continuing to mandate the LEI for various use cases.
Speaking to SFT about future steps, Wolf says: “LEI adoption is currently weak in Africa. We have good coverage in Nigeria and South Africa, but less so in the Sub-Saharan area.” As part of its roadmap to advertise the LEI and work together with international organisations to foster its adoption in Africa, GLEIF recently ran a project to onboard NMB Bank in Zimbabwe as its first African validation agent.
“In doing so, we were able to showcase how the LEI could help African companies to easily participate in global trade,” says Wolf. “We have no pickup of the LEI in South America. Everywhere else in the world, you see growth potential and people endorsing the LEI.”
