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What is LEI and its importance?

Legal Entity Identifier

LEI stands for a Legal Entity Identifier, which is a unique code for a legal entity such as a trust, fund, limited company, or any organization. The LEI code includes a combination of 20 numbers and letters; it is an alpha-numeric code. This code helps in identifying the entity on a global database of various entities. These entities are able to be searched by number instead of names, as many entities may have the same or similar names. The LEI code is given as per ISO (International Organization for Standardization) standards. This code is now a legal requirement within the global financial system for many companies. These days many companies are dealing in the global financial market. 

The LEI record of the companies must consist of public data such as name, address, place where they are registered, information about the branch if any, or if it is a company owned by another parent company. To date, more than 1.8 million LEIs have been created globally. It is getting adopted more quickly as a global standard for doing a business transaction at the global level. 

The various market participants can be identified by the LEI code on a single standardized database. This allows accurate data of a company that is accessible and free of use without charge. 

Here is the importance of Legal Entity Identifiers (LEI):

  • Helps in avoiding difficulties faced before finding out about the counterparty without any digital presence. Digital absence was a lot problematic in the global financial crisis a decade ago. 
  • With the introduction of the LEI code, the financial institutions are now in the position of identifying vast numbers of entities and funds. Also with this, it has solved the complications relating to risk assessment and transparency.
  • The G20 has launched the LEI code system in the year 2011 and has ensured to eliminate the complications that are going on in the past.
  • LEI code helps in creating a digital database, where all the legal entities are easily accessible, accurate, and up to date. It can be said as a centralized source of information, which is capable of attaining high-quality data. The database can be accessed by using the LEI search tool. 
  • The LEIs code helps the business houses in linking data sets and improving their analysis. 
  • It also helps in building a complete image of the business, by linking the data, as it could help small business houses to access finance. 
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Who regulates the system?

The legal entity identifier is regulated by the ROC through the GLEIF i.e the Global Legal Entity Identifier Foundation. Even the regulatory use of the LEI codes is mainly managed by the regional and jurisdictional authorities. 

Various benefits of obtaining a LEI system are:

The introduction of the LEI system is very much beneficial in many forms.

Uniqueness and Singularity

The LEI code system assumes that to a legal entity only one legal entity identifier can be assigned. Also, the LEIs cannot be used more than once. 

Persistence

The Legal Entity Identifier system is immune to the changes that happen in the lifetime of a business entity. If the business entity is completely dissolved through a merger or a closure or completely subsumed by another business entity then the original identifier code shall remain in the working position. Hence the retrieval of data from reference corresponds to the time of the entity’s activity. 

Neutrality

The LEI codes are wholly neutral. From their core, they form a single data field and do not hold any embedded intelligence. It means that the value of an identifier cannot be used to compromise neutrality. 

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