Asia Pacific Firms Lagging in LEI Adoption – FSB

Although widespread coverage has been achieved in OTC derivatives and securities markets, LEI adoption remains uneven across jurisdictions, with Asia Pacific lagging.

The FSB (Financial Stability Board) has published a thematic review on the implementation of the LEI (Legal Entity Identifier), and setting out recommendations to promote broader adoption.

The LEI is a 20-character, alpha-numeric code that was introduced following the global financial crisis to uniquely identify legally distinct entities that engage in financial transactions.

Since the G20 endorsement in 2012, over 1.4 million entities are uniquely identified by an LEI in more than 200 countries, the FSB says.

Most member jurisdictions have implemented rules mandating LEI use in at least one area, and widespread coverage has already been achieved in OTC derivatives and securities markets.

However, outside securities and derivatives markets, coverage is too low to effectively support new industry or regulatory uses, or to reach a tipping point where voluntary take-up by market participants would suffice to propel further adoption.

LEI adoption also remains uneven across jurisdictions, with coverage concentrated in Canada, the EU and the US.

Indeed, a large international bank had noted in a written submission to the FSB that LEI coverage reached 69 percent for its European customers, 29 percent for its US customers, and just 4 percent for customers in Asia-Pacific.

The FSB says several jurisdictions – particularly in Asia and emerging economies – have not taken steps to mandate use of the LEI in any area, or have adopted rules requiring LEI use only if the entity already has one.

Adoption has been most successful when the LEI has been mandated by regulators as part of an international standard-setting effort or across multiple market segments.

In the FSB’s engagement in its peer review, the difficulties of convincing entities in Asia, due to the lesser scope of LEI requirements in some Asian jurisdictions, was mentioned several times.

More efforts need to be made at both the national and international levels to promote LEI adoption and enhance the benefits to authorities and market participants from its use by addressing identified obstacles, the FSB says.

One of the obstacles is that the usability of relationship data is sometimes falling short of authorities’ expectations, such as where information cannot currently be collected due to confidentiality or where accounting consolidation rules do not always meet all the needs for relationship data.

There is also a perceived asymmetry between the financial burden and the benefits of having an international standardised identifier, as those who benefit the most (e.g. supervisors, banks, etc.) tend to contribute marginally to financing the LEI system, while those who benefit the least are the ones paying for LEI issuance and renewal.

The existence of other no- or low-cost national identifiers and the systems built around those identifiers also reduce incentives for jurisdictions to promote mandatory LEI adoption, especially in markets where firms undertake limited cross-border activities, the report says.

It offers recommendations to address the issues identified in the peer review and promote broader LEI adoption.

For example, the FSB is looking to facilitate the effective implementation of the LEI option in payment messages to help address the decline in the number of correspondent banking relationships.

It also recommends that standard-setting bodies and international organisations review and consider ways to embed or enhance references to the LEI in their work, such as in guidance on including the LEI in disclosures of data on entities, and by promoting LEI use in securities transactions and cross-border payments.

The FSB also says that minimising the cost and administrative burden of LEI registration and maintenance for registrants, such as through greater reliance on third parties for data verifications and updates, may help to address some of the challenges.

Exploring further use cases, improving relationship data availability and quality, and mapping to other identifiers would also expand LEI adoption.

The full report is available here.

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