Uneven International Uptake as LEI Deadline Approaches.
Initially promoted by the Financial Stability Board and administered under the auspices of the Global LEI Foundation (GLEIF.org), the worldwide Legal Entity Identifier (LEI) initiative has seen significant implementation in the US with the convergence of the Dodd Frank Act and the governance of the US Commodity Futures Trading Commission.
Its European incarnation comes into play on January 3rd 2018, with the introduction of the Markets in Financial Instruments Directive II (MiFID II). It is interesting to note however, that the EU’s MiFID II implementation stretches beyond Europe’s borders. It affects all trades that have an EU-based counterparty and therefore has a reach that extends far beyond Europe, to all firms that trade with a European partner.
Extraterritorial Effect
If you are outside the EEA (European Economic Area), it may not be obvious to you why you may need an LEI. However, it should be noted that while the “No LEI, No Trade” mantra that has been expounded by regulators stems from an EU regulation, its indirect effect is tantamount to extraterritorial enforcement in many cases.
If an EU-based firm happens to be trading with entities outside the EU, the regulatory requirement to report the LEIs of trading partners rests with the EU-based company. The company will be in breach if their regulatory reports do not contain the LEIs for trading global partners.
Regional Uptake
At first glance, it would seem that LEI registrations have largely followed a Euro-centric pattern thus far. According to LEI Lexicon (https://search.leilex.com), Dutch-based GMEI Utility having registered the most LEIs; 47,659 over the course of the last year. It should be noted however that nearly half of these came from the United States.
It seems therefore, that the Anglo-Saxon financial centres of London and New York have led the charge with regard to the registration of LEIs. The London Stock Exchange Group has registered 22,472 LEIs in the last year, whereas 22,250 LEIs were affixed to firms registered in the United States in the same time period.
Notable Lack of Traction in Asia & Emerging Economies
Hong Kong, despite being the world’s third most competitive financial centre, has only registered 2,189 LEIs in totality. The numbers from Singapore (the fourth most competitive financial centre globally) are not much better, at 2,449.
It’s not entirely clear what the slow uptake in Asia’s financial centres means, but given their interconnectedness with the global economy and the prevalent need for LEIs in the financial sector in particular, it is surely significant.
The LOUs of Korea and Japan have registered 65 and 1,090 respectively in the last year, highlighting both the disparity between neighbouring countries and the lack of purchase in the region generally.
The last year has seen only 106 registrations in the national LOU of Russia, 110 in China, 55 in Nigeria and 69 in Turkey.
Questions therefore abound. What will these low numbers mean for the global economy on deadline day? Will this create a bottleneck in the normal function of international markets, or will the urgency that regulators have sought to introduce be enough to get trading firms over the line in time?
A lot will depend on the capacity of LOUs to turn around LEI applications in a timely manner. It currently takes two days on average following the application for an LEI code to be assigned. It may be the case that this could be expedited through further automation.