Legal Entity Identifier

Last Updated 8/1/17

The 2008 global financial crisis brought heightened awareness of the need for financial transaction transparency in order to accurately assess exposure to counterparty risk. Financial regulators began discussing the need for a global standard for identifying financial contracts and their participants in 2010. The following year, a standard for Legal Entity Identification (LEI) was developed by the International Organization for Standardization (ISO). In response to this growing movement, the Financial Stability Board (FSB) developed a set of principles and standards covering governance, funding, standards, and validation. It also established an operating model and began coordinating work toward implementing a global legal entity identifier framework. The Group of Twenty (G-20) then moved to endorse the FSB’s operating model, setting March 2013 as an implementation target.

Overview:
The LEI is a unique 20-character alphanumeric code–like a bar code–assigned to any organization or firm involved in a financial transaction. Such an identifier for each legal entity allows regulators to conduct more accurate analysis of global, systemically important financial institutions and their transactions with all counterparties across markets, products and regions, allowing regulators to better identify concentrations and emerging risks. It also allows local regulators to realize these same benefits. For risk managers in financial institutions, the LEI increases the effectiveness of tools aggregating their exposures to counterparties.

Full implementation of LEI will have a dramatic impact on the global transparency of financial transactions. Regulators will be able to incorporate more LEIs into their surveillance analysis to conduct more accurate analysis of global, systemically important financial institutions and their transactions with all counterparties across markets, products and regions, allowing regulators to better identify concentrations and emerging risks. However, full implementation of LEI into systems requires extensive leveraging of technology, which can impact costs for regulators and reporting entities. Despite the potential implementation costs, most industry experts point out that there are significant benefits for companies that effectively integrate LEI into their risk management activities. For companies that embrace LEI, experts cite that the benefits include reduced operational risk, increased cross-selling, better pricing, and streamlined financial functions.

While the LEI on its own does not measure systemic risk, when combined with transaction information on the risks being exchanged by counterparties, LEI does allow regulators and parties to the transactions to gain a more complete and accurate picture of risks than ever before.

Status:
The NAIC began working on the LEI initiative in 2011. A proposal to add the LEI to its insurance industry regulatory reporting was adopted by the NAIC Blanks Working Group in 2012. The Global Legal Entity Identifier Foundation (GLEIF), established by the FSB, is tasked to support the implementation and use of the Legal Entity Identifier (LEI), with oversight from the LEI Regulatory Oversight Committee (LEI ROC). As of June 2017, over 500,000 entities in 200 countries had obtained LEIs from 30 operational issuers accredited by the GLEIF. NAIC staff continues to monitor this situation. Updates regarding the status of the global LEI system can be found at www.leiroc.org.