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Why is LEI Important for businesses? Exploring its significance
As businesses grow and expand globally, they face many challenges, including complying with complex regulatory requirements. In this context, the Legal Entity Identifier (LEI) has emerged as a critical tool for businesses to meet regulatory demands and streamline their operations. This article explores the significance of such an approach for companies and why obtaining it is crucial.
What is it?
The Legal Entity Identifier is a unique system assigned to legal entities that engage in monetary transactions. It is a 20-digit code identifying a legal entity participating in a financial transaction. A standardised code enables regulators and other stakeholders to identify and monitor financial transactions easily. This system was developed in response to the 2008 financial crisis, highlighting the need for better transparency and accountability in financial markets.
Why is it Important for Organizations?
Obtaining it is critical for organisations that engage in financial transactions. This unique system enables regulators and other stakeholders to identify and monitor financial transactions quickly. This is especially important in global financial markets, where organisations operate across different jurisdictions and are subject to multiple regulatory requirements.
• Compliance with Regulatory Requirements: One of the primary reasons why companies need to obtain a Legal Entity Identifier is to comply with regulatory requirements. Many financial regulators worldwide require companies to obtain such an approach as a condition for participating in financial transactions. For instance, the European Securities and Markets Authority (ESMA) requires all entities that trade financial instruments on European exchanges to obtain a Legal Entity Identifier. Similarly, the Commodity Futures Trading Commission (CFTC) in the United States requires businesses that engage in derivatives trading to obtain it. By obtaining this, companies can demonstrate compliance with regulatory requirements and avoid penalties for non-compliance. Failure to obtain this can delay financial transactions and harm a company’s reputation.
• Streamlined Operations: Obtaining this system can also help businesses to streamline their operations. Its system enables businesses to quickly identify and verify the identity of their counterparties, which can help to speed up the process of conducting financial transactions. This can be especially important in complex financial transactions, where verifying counterparty identity can be time-consuming and costly.
• Enhanced Market Access: Obtaining this can also enhance market access for organisations. Many financial markets worldwide require organisations to obtain it as a condition for participating in financial transactions. By obtaining this approach, organisations can demonstrate compliance with regulatory requirements and access a broader range of financial markets. This can help them expand their operations and take advantage of new business opportunities.
How to Obtain This?
Obtaining this system is a relatively straightforward process. Businesses can obtain it through a Local Operating Unit (LOU), an organisation authorised to issue Legal Entity Identifier. Businesses can choose from several LOUs worldwide, including Global Legal Entity Identifier Foundation (GLEIF) and also the London Stock Exchange (LSE).
To obtain this, companies must provide certain information about their legal entity, such as their legal name, registered address, and registration number. Once the information has been verified, the LOU will issue an LEI to those organisations.
This is a crucial tool for businesses that engage in financial transactions. As such, companies operating in the global financial markets should consider obtaining this to ensure compliance with regulatory requirements and enhance competitiveness.