Impact of LEI delays on MiFID II/R filing timeline

Eligible legal entities have until 3 June 2018 to obtain their LEI (Legal Entity Identifier) code. After June 3, no EU investment firm can provide any service that triggers the obligation to submit a transaction report for a transaction entered into on behalf of a client who is eligible for the LEI code, before obtaining the LEI code from that client.

The requirement of LEI for MiFID II/R transaction reporting

MiFID II requires accurate identification of all relevant parties in transaction reports as it’s crucial for efficient and effective monitoring of the activities of investment firms and ensuring that they act honestly, fairly, professionally, and in a way that promotes the integrity of the market. In order to allow proper market monitoring, transaction reports should identify the legal person who make the investment decision, as well as those responsible for its execution.

MiFIR not only obligates an EU investment firm to obtain an LEI code for identification purposes under MiFID II transaction reporting but also to identify its clients that are legal persons with LEIs. In this respect, MiFIR introduces a requirement for clients (buyer/seller) on whose behalf an investment firm that executes transactions in financial instruments to be identified through an LEI code. The requirement applies when the clients are legal entities. The term ‘legal entity’ includes parties that are legally or financially responsible for the performance of financial transactions, or have the legal right in their jurisdiction to enter independently into legal contracts, regardless of whether they are incorporated or constituted in some other way. For example, trust or partnership. It also includes individuals acting in a business capacity.

No LEI, no trade requirement of ESMA

Until the June 3 deadline, an EU investment firm may offer its services to an eligible entity provided that it obtains the client’s LEI code or the necessary documentation is obtained from the client to apply for an LEI code on behalf of its client. By the no LEI, no trade rule, without an LEI, the transaction report will fail the validation test and be rejected by the ARM (approved reporting mechanism) or NCA (national competent authority). In case wherever necessary documentation is obtained, the investment firms can now trade and then submit the transaction reports once the LEI is obtained.

Impact of the delay and how firms are set to handle it

The pressure is still on and regulated firms need to ensure they are in the process of putting in place LEIs for every client, counterparty and issuer they deal with. The investment firms should also ensure whatever the potential market disruption that could be caused by a lack of LEIs, the emphasis now during this six months must be on filling any LEI gaps.

Some firms are taking a trading activity-based approach to this, reviewing trades over the past couple of years, checking that counterparties have an LEI, and trying to fill the gap if they don’t. Others are taking a more rounded approach, reviewing existing LEI data sets against external sources such as the GLEIF’s Global LEI Index and other market data sources to spot any gaps.

Rather than leaving it to clients to get their entity data right, many firms are taking a proactive approach with outreach programs that help clients register for required LEIs. Regulators are expected to take a proportionate and pragmatic view of MiFID II compliance within this grace period. However, with an already given grace period there will likely be little forgiveness for not meeting this new deadline.