Mandating LEIs in Asia

The use of legal entity identifiers (LEIs) to assist regulators and market participants to identify and manage financial risks has been on the rise globally, especially since it has been made mandatory in jurisdictions such as the US and Europe. There is now a total of 464,231 LEIs in issuance around the world, with almost a quarter of those outside the US.

However, the number of LEIs issued for entities in Asia, with the exception of Australia, is still small enough to be classified under 'other countries,' which account for 6.8 percent of LEIs globally. While registrations have been increasing and are in line with the target set by the Global LEI Foundation of 1.5 million by 2020, regulators in Asia have not necessarily followed in the footsteps of the US Commodity Futures Trading Commission and the European Securities and Markets Authority.

Singapore is the only Asian country to mandate the use of LEIs for over-the-counter derivatives trade reporting. Although countries such as Australia and Hong Kong prioritize the use of LEIs to identify counterparties, they still allow other forms of entity identification. In Australia, if a counterparty does not have an LEI, it may use an international business entity identifier issued by Avox, the entity reference data unit of the Depository Trust & Clearing Corporation (DTCC), or the Business Identifier Code (BIC) administered by messaging standards organization Swift. Avox manages more than 2.2 million entities for clients globally, but just 500,000 of those have registered LEIs—and only 15 percent of Avox's registered LEIs are from Asia.

In Hong Kong, if there is no LEI, a transacting party may use the BIC, the certificate of incorporation number issued by the Companies Registry of Hong Kong, and lastly, the business registration number issued by the Inland Revenue Department of Hong Kong.

Malaysia Deadlock

In the case of Malaysia, local regulators had previously brought up the discussion of using LEIs in the form of a consultation paper. In March 2012, Malaysia's central bank, Bank Negara, and Malaysia Deposit Insurance Corp (PIDM), which is the legislative body for bank deposits and insurance, issued a joint public consultation paper on OTC derivatives reporting requirements to a trade repository.

Some of the respondents to that paper suggested that the proposed standardized counterparty identifiers should be confined to only the BIC or local business registration number to avoid using other non-standardized identifiers. Others suggested adopting the global LEI to be consistent with international standards.

The two regulators, in conclusion of the report, agreed to use either BIC or the local business registration number as the interim counterparty identifier, which it would incorporate in a separate public consultation paper with the Securities Commission of Malaysia (SC) on trade repository reporting requirements for OTC derivatives.

"While there are many potential benefits for the adoption of the global LEI system, further assessment is necessary to identify and understand better domestic implementation issues. The Bank, SC and PIDM will further engage the industry on the use of the global LEI system during the trade repository consultation process," the central bank said in the response.

Since that response, discussions between all three Malaysian regulatory bodies are still ongoing. Malaysia currently has 252 registered LEIs, according to GLEIF.

Following Singapore's Lead

Industry experts resoundingly agree that it is only a matter of time before jurisdictions in Asia follow in Singapore's footsteps and mandate the use of LEIs. This is in line with the commitment made by the G20 countries to establish a global LEI system.

Mark Davies, Avox general manager and managing director at DTCC Europe, agrees and adds that countries such as China, India, Japan and Korea all have full membership in the LEI Regulatory Oversight Committee (ROC). "Based on this, it is expected that each of those countries would mandate LEI use in upcoming regulations," he tells Inside Reference Data.

Phung Pham, head of derivatives in the capital markets practice at Baker & McKenzie in London, believes the LEI will become more common in Asia because of these countries' participation.

Many large Asian entities transacting in the Europe and the US have already registered for an LEI, he says. "Given that the administrative cost for obtaining an LEI is very low, the cost/burden for Asian market participants would similarly be very low if Asian regulators decided to make LEIs a mandatory requirement," Pham adds.

Given that the administrative cost for obtaining an LEI is very low, the cost/burden for Asian market participants would similarly be very low if Asian regulators decided to make LEIs a mandatory requirement
Phung Pham, Baker & McKenzie

Inclusion of the "no LEI, no trade" rule in Europe's revised Markets in Financial Instruments Directive (MiFID II), which takes effect in January 2018, will only act as a catalyst for entities in Asia to get on board, according to the DTCC's Davies.

"‘No LEI, no trade' fundamentally changes the onboarding process for firms who could previously wait to get their code," he says. "Many firms in Asia, both financial institutions and corporates, will now need to acquire an LEI for trading activities with European entities. MiFID II will be a defining step in LEI adoption globally, and the next 18 months promises to be very busy as firms look to close their known LEI gaps."

The ROC estimates that there are hundreds of millions of eligible entities, so if more regulators required registration it would be very easy for the GLEIF to hit its target of 1.5 million LEI registrations.

Pham expects the proportion of LEI registrations in Asia to broadly correlate with the existing ratio of Asian market participants compared with European and US market participants. "It should be kept in mind that the total number of LEI registrations would not be as important for regulators as ensuring that those entities with systematically material trading activities are captured by LEI registration," he says.

New Uses for LEIs

While the majority of LEIs have been used mainly for trade or derivatives reporting, they are increasingly used in other areas. Pham says that six US agencies—the Office of the Comptroller of the Currency, the Treasury, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Federal Housing Finance Agency, and the Department of Housing and Urban Development—have requested that the 20-character alphanumeric code be used to identify the obligor of loans or assets held or to be held by an open market collateralized loan obligation, in the information provided to potential investors.

Also in Europe, starting on January 1, originators of structured finance instruments will be required to use LEI for identification. "It may be possible for LEIs to be used by banks for customer identification purposes, allowing banks to quickly conduct know-your-customer (KYC) and anti-money laundering checks on customers and all known affiliates and corporate groups," says Pham.

Thomson Reuters has its own reference identifier, PermID, which creates a unique reference code to help firms handle data management, among other things. Adam Garrett, Asia market development manager for enterprise at Thomson Reuters, says that while the LEI is only for legal entities, PermID can be used for much more. "PermID is capable of being a unique identifier for anything, not just companies but also securities, individuals, documents, and more," he says.

Richard Storey, head of KYC, onboarding, clients and consulting for Asia-Pacific at Thomson Reuters, says the firm started PermID because the LEI initiative is still moving at a slow pace due to the fragmentation globally.

As with Malaysia's regulators, who after three years are still considering whether LEIs should be the standard for entities there, it looks like progress for a blanket mandate is moving at a crawl.