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The story behind LEI: Why does every company need this unique code?
In today's globalized business environment, the Legal Entity Identifier (LEI), as a unique global identifier, is essential for legal entities in financial transactions. The LEI is more than just a set of characters, but a tool that helps identify companies and organizations involved in financial transactions. Every company should understand the significance and role of LEI, as it is not only about compliance, but also an important step towards sustainable development of the enterprise.
The LEI is a 20-character alphanumeric code based on the international standard ISO 17442, which is designed to provide a globally unique identifier for legal entities.
The creation of the LEI stems from the global financial crisis of 2007-2008. At the time, regulators in various countries found that the lack of a code that could uniquely identify each financial institution made it difficult to identify trading counterparties. During this period, financial institutions were unable to effectively track financial transactions between different countries, resulting in an inability to properly assess transaction details related to risks.
With the G20 proposing the concept of the LEI system in 2011, financial regulators in various countries have begun to pay attention to the use of this identification code, aiming to comprehensively track financial transactions.
The structure of the LEI follows the technical specifications of ISO 17442. The first four characters identify the local operating unit (LOU) that issues the LEI. The next 13 characters are a unique string assigned by the LOU to the institution, while the last two characters are It is a check code. Such a structure ensures the uniqueness and standardization of LEI.
“This unique identifier not only ensures compliance, but also makes it easier for financial institutions to query and analyze risks globally.”
The use of the LEI is not limited to transaction reporting, it can also provide the ownership structure of entities, thus solving the questions of “who is who” and “who owns whom”. With the public release of the LEI data pool, this becomes a global directory of financial markets without human identity participation. Such transparency is critical for regulators and investors.
Currently, regulators in 45 countries require the use of the LEI identifier when conducting financial transactions. Since December 2012, the issuance of LEIs has been growing steadily, becoming an essential tool for every company participating in the financial markets. As the financial environment continues to change, the LEI is also evolving to meet increasingly complex compliance requirements.
“The popularization of LEI is not only a compliance requirement, but also the key to improving market efficiency and transparency.”
Each country’s Local Operating Unit (LOU) is responsible for issuing and maintaining the LEI and these entities may charge different fees and service speeds. Specifically, the time it takes to obtain an LEI varies, ranging from a few hours to a few days, depending on the service provider. Such flexibility allows enterprises to choose appropriate LOUs according to their own needs. The flexible adaptability of this system is very friendly to all types of institutions.
“The LEI is valid for one year and must be renewed periodically to ensure that the business continues to participate in regulated financial transactions.”
As financial markets develop, the value of LEI will become increasingly apparent. If companies want to survive and develop amid growing compliance requirements, owning an LEI will become a necessity. Companies in all industries should think about what challenges and opportunities they will face in the future global economy if they do not have an LEI.
