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The secret key to financial transactions: How does the LEI help track companies around the world?
In today's complex financial world, transparency in financial transactions is critical to the global economy. However, the ability to identify actors is challenged when it comes to companies and institutions in different countries. At this time, the Legal Entity Identifier (LEI) has become an important tool in the financial industry. It not only helps companies build good trust, but is also the mysterious key to global financial transactions.
The Legal Entity Identifier (LEI) is a unique global identifier that identifies legal entities involved in financial transactions.
Basic concepts of LEI
The LEI is a 20-character alphanumeric code constructed according to the ISO 17442 standard developed by the International Organization for Standardization (ISO). The main purpose of this identifier is to be able to identify legal entities, such as companies or government agencies, on a global scale, thereby increasing transparency in financial transactions. Unlike individuals, only legal entities can obtain an LEI.
History of LEI
The birth of the LEI can be traced back to the financial crisis of 2007-2008. At the time, regulators found that the lack of unique identifiers made it difficult for them to track risk exposure across financial institutions. Different countries have different identification systems, which makes it impossible to effectively identify the source and risks of transactions. As a result, the financial crisis was exacerbated by a lack of transparency.
The LEI system was developed in response to the G20’s recognition of the need for financial institutions to have unique identifiers to track their transactions.
Structure and function of LEI
The structure of the LEI consists of three parts: the first four characters identify the Local Operating Unit (LOU) that issued the LEI, the next 13 characters are the unique identifier of the legal entity, and the last two characters are the The characters are the check code. Although the LEI code is generated according to technical standards, the code alone cannot provide people with other valuable information and is only used to uniquely identify a legal entity.
Data structure of LEI
LEI reference data can be divided into two levels: Level 1 provides basic information about companies and answers the question “Who is who?” while Level 2 explains “Who is who?” Owned by whom?" relationships, including data for both direct and ultimate parent companies.
LEI data provides financial institutions with a global directory of legal entity participants, which is critical for risk management.
How to obtain an LEI
The Global Legal Entity Identifier Foundation (GLEIF) does not issue LEIs directly, but delegates this responsibility to Local Operating Units (LOUs). These LOUs offer a variety of services and have different prices and issuance speeds. The process from applying to obtaining an LEI can take anywhere from a few hours to days or weeks, depending on the service provider.
Validity and renewal of LEI
The LEI is valid for one year from the date of registration. All companies wishing to continue to participate in regulated financial transactions must renew annually. Renewals can be made through any certified LOU and the code will remain the same even when transferred between different LOUs.
The importance of LEI and future prospects
Currently, 45 jurisdictions around the world require the use of the LEI for various financial transactions. Taking the regulatory requirements of the United States and European countries as an example, all companies involved in over-the-counter derivatives transactions must use this identification code when reporting transaction details to financial regulators. This not only helps promote market transparency, but also reduces the possibility of systemic risk.
As the world places increasing emphasis on financial transparency, the use of the LEI is likely to expand further. In the future, we may witness more industries begin to use the LEI to better track and manage risks and further enhance consumer trust. In light of this, do you think the LEI will become an important part of the future global financial system?
