As the 21 October deadline looms for compulsory use of Legal Entity Identifiers (LEIs) in over-the-counter (OTC) derivate transaction reporting, Australia has missed an opportunity to unlock the additional value of the LEI by not requiring the annual renewal of these identifiers, , according to Chris Donohoe, CEO, APIR.

The Australian Securities and Investment Commission (ASIC) has worked closely with a broad range of stakeholders to harmonise transaction reporting regulations with international standards. From 21 October 2024 all entities that undertake over-the-counter (OTC) derivative transactions will be required to provide a LEI in order to trade and comply with ASIC Derivative Transaction Rules (Reporting) 2024. Up until now, ASIC has allowed entities to use AVIDs or Bank Identification Codes (BIC)when reporting to the regional derivative reporting repository.

“The October 21 deadline brings Australia in line with other jurisdictions and achieves a long-held goal of global regulatory harmonisation. The LEI’s adoption in OTC derivative transactions will better align Australia’s regulatory system with regulation frameworks in the EU, US and UK,” said Mr Donohoe.

“However, the true value of the LEI will only be unlocked when the LEI and it associated data is verified on an annual basis, as is intended under the Global Legal Identifier Foundation (GLEIF) rules. This would maintain the integrity of the system and meet the objectives set by the G20 and the Financial Stability Board when the LEI regime was created,” he said.

“It does question whether the value of Australia’s OTC reporting regime has been diminished by non-compulsory renewal.  Australia’s ‘lapse rate’ – the percentage of LEIs that have not been renewed --as at June 2024 was approximately 47% which does not compare favourably to the global lapse rate of 41% or world leading countries such as India which has a lapse rate of 15%,” Mr Donohoe said.

The LEI is a structured 20-digit alphanumerical code working much like an ABN; it identifies legally distinct entities engaged in financial transactions and the entity’s ownership structure. The LEI requirement was agreed on by the G20 in response to the GFC. The LEI later formed part of the European Markets in Financial Instruments Directive (MiFID II) reporting regime.

The LEI captures not only the entities participating in the transaction, but also the details of any parent entities and ultimate parent ownership. It unveils, ‘who is who’ and ‘who owns what’ and so is a crucial identifier that will enable regulators to better oversee financial markets and monitor financial stability.

“It is encouraging to see a range of global initiatives leveraging off the potential identity and integrity power of the LEI regime. Many of these initiatives are outside the traditional LEI use cases, however the various regulators need to consider LEI renewal requirements to ensure that these initiatives deliver their intended objectives,” said Mr Donohoe.

According to the Global Legal Entity Identifier Foundation (GLEIF), the future of LEIs lies in their universal application across public and private sectors, with relevance to small and large organisations to bring greater trust, efficiency and transparency to global trade of all kinds and across cross-border payments, supply chain, digital organisational identity, and in sustainability and environmental, social and governance (ESG) reporting.

“We’ve seen further adoption of the LEI in global jurisdictions to boost transparency and trust. This includes

• The recommended adoption of the LEI by the G20 in their Roadmap for Enhancing Cross-border Payments. In the UK, the Bank of England has championed the use of LEIs in cross-border payments and stressed that financial crime checks could be simplified by using LEIs as a reference to access due diligence information;  
• US Customs and Border Protection evaluating the use of the LEI to assist with data exchange and credential verification across e-commerce, food safety and natural gas industries; and
• In India we’ve seen expanded use of the LEI within other financial transaction such as corporate borrowing.

Mr Donhoe concludes: “It is essential that Australian regulators and industry participants understand and, where appropriate, embrace such global initiatives to further enhance transparency, trust and interoperability.”

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