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Answers hidden in the financial crisis: How did LEI change financial regulation?
As the global financial system becomes increasingly complex, financial regulators are facing a major challenge: how to effectively identify the various legal entities involved in financial transactions. The 2008 financial crisis highlighted the urgency of this issue. The financial crisis brought not only an economic impact, but also revealed the need for a unified identification code to identify financial institutions. Therefore, under this background, the Legal Entity Identifier (LEI) came into being and became an important tool for global financial supervision.
LEI is a unique global identifier used to identify legal entities involved in financial transactions, helping regulators obtain important information about market participants.
What is LEI?
Legal Entity Identifier (LEI) is a 20-character alphanumeric code encoded in accordance with the International Organization for Standardization (ISO) 17442 standard. This identification number is used not only to identify the legal entity but also to connect to key information related to the ownership of that entity. In other words, LEI helps answer the questions of “who is who” and “who owns whom”, allowing regulators to clearly identify and track various types of financial transactions.
History of LEI
The creation of the LEI can be traced back to the financial crisis of 2007-2008. At the time, regulators realized that identification code systems varied between countries, making it impossible to accurately track transaction details and calculate risks. Therefore, the LEI was born in 2011 at the initiative of the G20 to obtain a unique identifier for legal entities in global financial markets. Currently, regulatory agencies in 45 countries require the use of LEI to identify legal entities in different financial transactions, thereby improving the transparency and stability of financial markets.
“The launch of the LEI system not only improves the transparency of financial transactions, but also provides regulatory agencies with new tools to analyze and evaluate market risks.”
LEI’s technical architecture
According to the ISO 17442 standard, the structure of the LEI consists of 20 characters. The first four characters represent the local operating unit (LOU) that issued the LEI. Characters 5 to 18 are the unique alphanumeric string assigned by the LOU to the legal entity, and the last two characters are the checksum. Although the format of the LEI code complies with technical specifications, the code itself does not contain any valuable information and is mainly used to uniquely identify each legal entity.
LEI as a global operating system
The Global Legal Entity Identification Foundation (GLEIF) does not issue LEIs directly, but delegates this responsibility to local operating units (LOUs). These LEI issuers offer different services and prices, and the time to obtain an LEI can vary from hours to weeks. GLEIF is primarily responsible for monitoring the quality of LEI data and system integrity.
LEI validity and updates
Each LEI is valid for one year and requires annual renewal thereafter. Any company or organization that wishes to continue to participate in regulated financial transactions must regularly update its LEI. Despite moving between different LOUs, the LEI code itself does not change, making the process of identifying institutions throughout financial markets simpler.
“The promotion and use of LEI not only changes the landscape of financial supervision, but may also become a core tool for future risk management and market analysis.”
Impact on financial regulation
The implementation of LEI allows financial regulators to more efficiently obtain detailed information about market participants, which was extremely difficult before. This transparency helps regulators better understand the risks of the entire financial system and then formulate more targeted regulatory policies. Today, with increasing global economic uncertainty, LEI is undoubtedly an important step towards stabilizing the financial market.
Summary
As the global financial market continues to evolve, LEI, as an effective identification tool, will play an increasingly important role in future financial supervision. However, as technology advances and market demands change, will the LEI system itself face the challenge of updating and adjusting?
