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MiFID II: Importance of LEIs and the Fighting Financial Crime

12thJuly2018

MiFID II, LEIs & the Fight Against Financial Crime

In a speech delivered last week, Mark Steward, Director of Enforcement & Markets Oversight at the Financial Conduct Authority shed insight on some aspects of MiFID II implementation and the ongoing fight against financial crime.

Speaking at a Global Enforcement event, Mr Steward opened by marking the 3rd July 2018 as an important day with regard to the implementation of MiFID II, since it was “the first day in which Legal Entity Identifiers (LEIs) will be required before firms can trade on behalf of their clients, following a six-month implementation period.”

But, why are LEIs so significant, especially with regards to the fight against financial crime, and exactly what is an LEI anyway?

What is an LEI?

An LEI is a Legal Entity Identifier, in other words, a unique identifier for persons that are legal entities or structures. Such entities can include companies, charities, funds and trusts.

The creation of a Global Legal Entity Identifier that “uniquely identifies parties to financial transactions” was supported by the G20 leaders at their Cannes summit in November 2011 and the Financial Stability Board’s high level principles and recommendations for the Global LEI System was later endorsed by the G20 in 2012.

What is the purpose of an LEI?

An LEI code is unique to a legal entity or structure, meaning that when an LEI code is allocated to an entity, that code is included in a global data system- a system that enables every legal entity or structure that is party to a relevant financial transaction to be identified all over the world.

LEI Requirements

From 3rd July 2018 firms require Legal Entity Identifiers (LEIs) before they can trade on behalf of their clients. 

With the increased transaction reporting requirements under MiFID II, (that commenced on 3 January 2018) and with software developed in-house at the FCA to “normalise and ingest disparate order book data-sets from the main lit and dark UK trading venues”, Mr Steward advised that the FCA is now able to track “potentially related trading activity on different venues and detect cross-market manipulation.”

This has led to the FCA commencing a number of investigations into firms’ systems and controls where, for the first time, we have indicated to those firms that we are looking at whether there has been any misconduct that might justify a criminal prosecution under the Money Laundering Regulations. 

Reports since the implementation of MiFID II are now providing a much more detailed, complex and clearer picture of the market and identify the buyer, the seller, the decision maker (where applicable), the investment decision within the firm (either an individual trader or an algorithm) as well as the type of execution within the firm  - whether an individual trader or an algorithm.

Do I need an LEI?

If you are a client who is a legal entity or structure, (this includes company charities or trusts), you will need to make arrangements to obtain an LEI code if you want the firm to continue to act on your instructions or make a decision to trade on your behalf now that MiFID II is in place.

Also, if you are subject to MiFID II transaction reporting obligations or are a UK branch of a third country firm, you will need to ensure that your clients eligible for an LEI have one before executing a transaction in a financial instrument subject to the MiFID II transaction reporting obligations on their behalf.

These financial instruments include shares, bonds, collective investment schemes, derivatives and some emission allowances.

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