MiFID regulation | MiFID II LEI

MiFID regulation 

MiFID is the Markets in Financial Instruments Directive. Applicable across the European Union since November 2007. It is a cornerstone of the European Union’s regulation of financial markets, looking to improve their competitiveness by generating a single need for investment services and activities and guaranteeing a high degree of systematised protection for investors in financial instruments.

MiFID sets out (as stated by the European Securities and Market Authority): 

• conduct of business and organizational requirements for investment firms;
• authorization requirements for regulated markets;
• regulatory reporting to avoid market abuse;
• trade transparency obligation for shares, and
• rules on the admission of financial instruments to trading.

MiFID II improvements

MiFID II and MiFIR (The Markets in Financial Instruments Regulation accompanying the European Union’s second Markets in Financial Instruments Directive or MiFID II) will help to ensure unbiased, secure, and more efficient markets while facilitating more transparency for all participants. The advanced reporting requirements and tests and tests expand the information available and reduce the use of dark pools and over-the-counter trading. High-frequency trading rules will force strict organizational requirements on investment firms and trading venues. While the provision regulates non-discriminatory access to central counterparties (CCPs), trading venues and benchmarks increase competition.

The protection of investors is reinforced through the introduction of new requirements on product governance, as well as independent investment advice, the extensions of existing rules to structured deposits, and the improvement of conditions in several areas, including the responsibility of management bodies, information inducements, reporting to clients, cross-selling remuneration of staff, and best execution.

“No LEI, no trade.”

MiFID II’s “No LEI, No trade” policy is somewhat neglected. However, there is a requirement for issuers of financial instruments admitted to trading on an EU trading venue (TOTV) to have an LEI. As stated by the Regulatory Technical Standards (RTS) 23, every day, trading venues must provide the European Securities and Market Authority (ESMA) with a list of the instruments that trade on their forum. Under the same RTS, investment companies have to provide ESMA with a list of devices for which they act as a systematic internalizer (SI), where the underlying is a financial instrument traded on a trading venue, or an index or perhaps a basket composed of financial instruments that are sold on a trading venue.

One field that needs to be provided in the RTS 23 instrument registration report is the issuer’s LEI (Annex 1, table 3, fields 27).

With ESMA’s relief from 2017, an interesting dynamic emerged. Instruments can be TOTV without the “issuer concerned” having an LEI. If an issuer does not have an LEI, trading venues (regulated markets, OTFs, MTFs) cannot trade the instrument on their platform. Investment companies, therefore, will not be able to trade the instruments as SI since they will not be able to comply with RTS 22.

What is an LEI?

The Legal Entity Identifier (LEI) is a 20-digit reference number used to uniquely identify parties in financial transactions worldwide, based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). The code was introduced as a critical measure to improve the quality and precision of financial data systems for better risk management during the Global Financial Crisis.

Who needs an LEI code?

The Legal Entity Identifier (LEI) will be issued to any legal identity, including but not limited to all:

• Banks, lenders, and investment companies
• Commodities traders
• CFDs (Contracts For Differences)
• Entities listed on the stock exchange
• Financial intermediaries
• Investors in mutual funds and hedge funds
• Trade OTC derivatives
• Self-Managed Superannuation Fund traders and investors
• Pension schemes
• Any entity needing to comply with the SFTR (Securities Financing Transaction Regulation)  

LEI will be assigned on application from the legal entity and after data processing.
For an organization, LEI will be:  

1. Used as a means of identification for a financial entity
2. Facilitate transaction reporting to Trade Repositories
3. Ensure compliance with regulatory requirements 

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LEI code search and LEI lookup

An LEI consists of 20 characters and will be issued to each company once:

• The first four characters are unique to the LOU, which has issued the LEI.
• The 5th and 6th characters are the same – 0 for every company.
• The following 12 characters are letters and numbers unique for each company.
• The final two characters are known as the checking characters. An LEI code search will reveal crucial information based on the entity’s ownership structure. As such, it can establish  ‘who is who’ and ‘who owns whom.’
  
  An LEI search will provide access to a global directory of participants within the financial market.   

LEVEL 1 – ‘Who is who’            LEVEL 2 – ‘Who owns whom’

Level 1 data includes entity registration details, like a legal name, number of registrations, legal address, HQ address, etc.

Parental (Level 2) data provides information about an entity’s ownership structure, thus answering the question ‘who owns whom.’ The available LEI data pool transfers structured entity registration data into a standardized global directory, greatly enhancing transparency in the global marketplace.