By Karla McKenna, Head of Standards at Global Legal Entity Identifier Foundation (GLEIF)
The Global Legal Entity Identifier (LEI) System is designed to ultimately help answer three questions: Who is who? Who owns whom? And who owns what? In other words, the publicly available LEI data pool can be regarded as a global directory, which greatly enhances transparency in financial markets.
The LEI is a 20-digit, alpha-numeric code based on the ISO 17442:2012 standard developed by the International Organization for Standardization (ISO). It connects to key reference information that enables clear and unique identification of legal entities participating in financial transactions.
The information available with the LEI reference data to date, e.g. the official name of a legal entity and its registered address, is referred to as ‘Level 1’ data. It provides the answer to the question of ‘who is who’. In a next step, the LEI data pool will be enhanced to include the ‘Level 2’ data that will answer the question of ‘who owns whom’.
In March 2016 the LEI Regulatory Oversight Committee (LEI ROC) published the document, entitled ‘Collecting data on direct and ultimate parents of legal entities in the Global LEI System – Phase 1’. The LEI ROC paper states that the approach for collecting data on organizational relationships is based on several premises: “First, the approach is assumed to be incremental. Because complexity in this area is high, the process implemented must proceed in steps as manageable as possible and the implementation process must be structured so that subsequent steps can be approached based on what has been learned. Second, the initial relationship types to be captured are to be based on accounting standards. Many other aspects of ownership, control or other relationships may be highly relevant in later phases, but the need for relative simplicity and clarity argues for a measure with sufficiently common support in all jurisdictions.”
The main features of the LEI ROC proposal on Level 2 data are summarized as follows in the report:
- An incremental approach: the document identifies the priority features that should be part of the first phase of this data collection, with the objective of starting implementation around the end of 2016. Adding data on parent entities was envisaged in the 2012 Financial Stability Board recommendations on the LEI and would augment the usefulness and attraction of the system for users. At the same time, the system is still at an early stage of development, with some 450,000 entities worldwide having acquired an LEI as of July 2016. The proposal seeks to avoid imposing unwarranted costs or complexities that could be detrimental to the expansion of the system. The LEI ROC is aware that this first phase may not meet all the needs expressed in earlier related consultations and will work on expanding the scope of relationship data in future phases, in consultation with relevant stakeholders.
- Entities that have or acquire an LEI would report their ‘ultimate accounting consolidating parent’, defined as the highest level legal entity preparing consolidated financial statements, as well as their ‘direct accounting consolidating parent’. In both cases, the identification of the parent would be based on the accounting definition of consolidation applying to this parent.
- Accounting definitions were chosen as a starting point as the LEI ROC concluded that their practical characteristics outweighed limitations caused by the fact that they are designed for a different purpose, i.e., to report relationships to investors on a going concern basis. These practical characteristics are that: (i) they are applicable to both financial and non-financial companies; (ii) their international comparability has increased, following greater convergence between IFRS (International Financial Reporting Standards) and US GAAP (Generally Accepted Accounting Principles) on the scope of consolidation; and (iii) they are widely used, publicly available and their implementation is periodically reviewed by external auditors.
- The information collected would be published in the Global LEI System and therefore freely available for public authorities and market participants, subject to a pilot phase to examine issues associated with collecting data on parents that do not have an LEI. At this stage, the Global LEI System will only record relationship data that can be made public, in accordance with the applicable legal framework.
- Entities would report relationship information to the LEI issuing organizations of the Global LEI System, which would verify the relationship information based on public documents if available (e.g., list of subsidiaries in audited consolidated financial statements; regulatory filings), or other sources.
- Information on parents would be part of the information that must be provided in order for an LEI to be issued or renewed, but with the option to decline providing this information for the reasons detailed in the LEI ROC’s report.
Who is who? Who owns whom? And who owns what?
Next steps
The Global Legal Entity Identifier Foundation (GLEIF) is responsible for carrying out the project management and developing the organizational and technical standards required to collect data on direct and ultimate parents of legal entities in the Global LEI System.
It is important to note that there will be no big bang rollout of Level 2 data, but a phased approach. GLEIF plans to launch a prototype exercise together with volunteering first mover LEI issuing organizations (also referenced as Local Operating Units) by the end of 2016 to demonstrate collection, validation and publication of relationship data. LEI issuing organizations act as the primary interface for legal entities that have registered, or wish to obtain, an LEI. GLEIF encourages firms that already have registered an LEI to proactively make Level 2 data available to their managing Local Operating Unit.
The mandatory collection, validation and publication of parent information will start at a date to be determined in early 2017. As of this date, all LEI issuers must have the capability to register and renew LEIs including Level 2 data. It is expected that Level 2 data for the entire LEI population will be available at the latest at the start of 2018, i.e. at the end of the one-year renewal cycle after the date when mandatory collection of Level 2 data starts. The information on direct and ultimate parents of legal entities will be published with a separate file on the GLEIF website. This avoids any disruptions to the established use of Level 1 data by market participants.
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