17-Jun-2023 LEGAL ENTITY IDENTIFIER CODE (“LEI”)legal entity identifier (lei) global financial crisis financial markets data quality counterparty risk regulatory compliance financial transactions regulatory reporting non-derivative markets
Learn about the Legal Entity Identifier (LEI) and its significance in regulating financial markets, improving data quality, and managing counterparty risk. Understand the broad applicability of LEI to various legal entities and its role in enhancing transparency and compliance with regulatory requirements. Explore the phased introduction of LEI in India and its impact on different sectors.
LEGAL ENTITY IDENTIFIER CODE(“LEI”)
LEI is an offshoot of Global Financial Crisis. Need for a system that would regulate financial markets and offer more clarity was felt to avoid next collapse of major economies. LEI codes were introduced to improve the quality of financial data and to decrease risks. LEI codes are regulated centrally by the international umbrella organization GLEIF. However, certain requirements, especially concerning which transactions specifically require LEI code, can differ among countries and therefore be confusing for market participants
The LEI is a global reference 20-digit code that uniquely designed to enable the identification and linking of parties to financial transactions and to manage counterparty risk. Its goal is to help improve the measuring and monitoring of systemic risk and support more cost-effective compliance with regulatory reporting requirements.
APPLICABILITY OF LEI TO VARIOUS LEGAL ENTITIES:
LEI will assign to any legal entities including but not limited to all intermediary institutions, banks, mutual funds, Sole proprietor, partnership, companies, trusts, holdings, special purpose vehicles, asset management companies and all other institutions being parties to financial transactions.
“LEI is not applicable to Individuals.”
LEI will be assigned on application from the legal entity and after due validation of data. For the organization, LEI will
- 1. Serve as proof of identity for a financial entity
- 2. Help to abide by regulatory requirements
- 3. Facilitate transaction reporting to Trade Repositories
WHICH ENTITIES REQUIRE LEI CODE IN INDIA?
- LEI has been introduced by the Reserve Bank in a phased manner for participants in the over-the-counter (OTC) derivative, non-derivative markets, large corporate borrowers, and large value transactions in centralized payment systems.
- LEI rules also apply to all foreign entities wishing to participate in above mentioned transactions. In case an entity is not registered as a legal entity in its country of incorporation, it should use the LEI code of its management/parent company. It includes for example all funds operating in India (registered as FPIs), which are managed by an entity abroad.
- It is mandatory for the resident entities (non-individuals) undertaking capital or current account transactions of ₹50 crore and above (per transaction) under FEMA, 1999 to obtain LEI code.
- Non-individual borrowers enjoying aggregate exposure of ₹5 crore and above from banks and financial institutions (FIs)2 shall be required to obtain LEI codes as per the timeline given:
|Timeline for obtaining LEI by borrowers Total Exposure||LEI to be obtained on or before|
|Above ₹25 crore||April 30, 2023|
|Above ₹10 crore, up to ₹25 crore||April 30, 2024|
|₹5 crore and above, up to ₹10 crore||April 30, 2025|
- Presently, RBI directions, inter alia, mandate non-individual borrowers having aggregate exposure of above Rs. 25 crores, to obtain LEI code. Following are the timeline for LEI code applicability to issuer who are listed or propose to list non-convertible securities, securitised debt instruments, security receipts and municipal debt securities; and Registered Depositories, as per SEBI circular dated 3 May, 2023.
|Category of security||Relevant Regulation||Applicability||Timeline|
|Non-convertible Securities||SEBI (Issue and listing of Non-convertible Securities) Regulations, 2021||Issuer proposing to issue and list non-convertible security||On or after September 1, 2023|
|Issuer having outstanding listed non-convertible security as on August 31, 2023||On or before September 1, 2023|
|Securitised Debt Instruments and Security Receipts||SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008||Issuer proposing to issue and list Securitised Debt Instruments or Security Receipts||On or after September 1, 2023|
|Issuer having outstanding listed Securitised Debt Instruments and Security Receipts as on August 31, 2023|
On or before September 1, 2023
- All payment transactions of value ₹50 crore and above undertaken by entities (non-individuals) using Reserve Bank-run Centralised Payment Systems viz. Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT) have to obtain LEI code.
- As per Insurance Regulatory Development Authority India (IRDAI), It is mandatory to obtain LEI by its regulated entities and entities dealing with regulated entities. Hence the insurers shall advice their existing corporate borrowers having total exposure of Rs.50 crore and above to obtain LEI code.
The implementation of Legal Entity Identifier (LEI) codes has emerged as a crucial measure in the wake of the Global Financial Crisis. These unique 20-digit codes play a vital role in improving data quality, managing counterparty risk, and enhancing regulatory compliance. With broad applicability across various legal entities involved in financial transactions, LEI codes facilitate transparency and systemic risk monitoring. In India, the phased introduction of LEI requirements by regulatory authorities, along with specific timelines and thresholds, ensures the effective adoption of LEI codes in different sectors, safeguarding financial stability and enhancing transparency in the financial system.
- 1. Legal Entity Identifier (LEI) codes were introduced after the Global Financial Crisis to regulate financial markets and improve data quality.
- 2. LEI is a 20-digit global reference code for identifying parties in financial transactions and managing counterparty risk.
- 3. LEI applies to various legal entities but not individuals.
- 4. LEI helps comply with regulatory requirements, facilitates transaction reporting, and serves as proof of identity for financial entities.
- 5. In India, LEI is required for OTC derivatives, non-derivative markets, large corporate borrowers, and high-value transactions.
- 6. Foreign entities participating in Indian transactions should also comply with LEI rules.
- 7. Resident entities and non-individual borrowers with specific exposure levels must obtain LEI codes as per timelines set by regulatory bodies.
- 8. LEI codes are mandatory for payment transactions above ₹50 crore in Centralized Payment Systems.
- 9. Insurers and regulated entities in India must obtain LEI codes or advise their corporate borrowers to do so.
- 10. SEBI has specific timelines for LEI code applicability for issuers of securities and registered depositories.