"The Value of the LEI for Identification in Digital
Processes"
Speech by Klaas Knot at the GLEIF Meet the Market
Event 2020 Amsterdam, 4 February 2020
This Meet the Market Event was hosted by the Global Legal Entity Identifier Foundation (GLEIF) and
organized in coorperation with DNB. In his opening address, Klaas Knot outlined the background to the
Legal Entity Identifier (LEI), and described the valuable role it can play in managing financial risks and
enhancing the quality and accuracy of financial data. Mr Knot also emphasised how authorities and
market participants alike can reap the benefits of more widespread adoption of the LEI.
Good afternoon, and welcome to 5-4-9-3-0-0-1-O-3-6-C-V-K-P-V-L-2-D-4-8. In other words, welcome
to De Nederlandsche Bank.
Of course, it is easier to call this place by its name. And not by its 20-character alpha-numeric code.
But the Legal Entity Identifier - in short, LEI - is a valuable initiative and that is what we are here to
discuss today. Before we do, let me share a bit of background, from my perspective about how and
why the LEI was developed. And how you can play an important role in further expanding its use.
Thereby making the financial system a little bit safer one LEI at a time.
Like many other regulatory innovations, the LEI was born out of the global financial crisis. The years
leading up to the crisis saw a diverse range of legal entities trading on financial markets. Many of them
were also part of much larger firms, even though this was not always clear. These financial
conglomerates combined many different structures and activities. And they operated across many
different jurisdictions.
But they also lacked transparency and stability. Lehman Brothers was a prime example of this: a
patchwork of cross-border and cross-entity interdependencies. Lehman's insolvency resulted in over
seventy-five separate bankruptcy proceedings. When it collapsed, the group was party to over nine
hundred thousand derivatives contracts.
When the crisis hit, it was unclear which party owed what to whom. The resulting insecurity caused
even more panic on the financial markets. The root of the problem was the large number of legal
entities, scattered across the world, with no uniform international method of identification.
The LEI was therefore introduced to address this problem and in 2012, the G20 endorsed the LEI
System as a global standard. The objective of the G20 is the "global adoption of the LEI to support
authorities and market participants in identifying and managing financial risks". Since it was
introduced, over 1.5 million entities in over 200 countries have registered for an LEI. The LEI has seen
widespread adoption in several financial markets most notably in the over-the-counter derivatives
markets. It is also used increasingly in the issuance of debt and equity securities in jurisdictions. In
other areas, the uptake of the LEI is less widespread, and the Financial Stability Board (FSB) continues
to monitor this progress.
In line with the G20 recommendations, the FSB is a strong supporter for a broader uptake of the LEI.
We see many benefits not just from a regulatory perspective. The LEI has helped to make the financial
system safer. Authorities can use it for many different regulatory purposes. They can for example use
the LEI to monitor financial risk, to keep track of financial entities' aggregate risk exposure, for
resolution planning. A good example is embedding the LEI in the data on derivative contracts reported
by trade repositories. This is very helpful in giving supervisors a clear picture of what is going on.
The LEI has also led to many improvements in the quality of data, and therefore in the quality of data
analysis. This opens up possibilities for research and data aggregation. It also improves the accuracy
of data reporting, and makes data more internationally comparable. The LEI is now being used in
international stress tests. It is invaluable in helping to understand interconnectedness. It has improved
our understanding of the build-up of risk across multiple jurisdictions.
These benefits are not only available to regulators and other authorities. Obviously, these advantages
are also available to the wider financial industry and academics.
Looking ahead, I am convinced the LEI will play an increasingly important role in anti-money
laundering processes. Banks in Europe are investing heavily in ways to combat illegal money flows.
This begins with knowing your customer. The LEI not only significantly reduces the time and
administrative burden required for customer onboarding.
It also ensures firms are able to clearly and unequivocally know their customers, and to keep track of
their financial identity. Not to mention the role the LEI can play in removing unnecessary complexity
from business transactions.
There are many other benefits. And these will multiply as new applications are discovered and
developed. Today's event is all about finding these benefits in the various areas of finance in which you
are active. Only by convincing market participants of the benefits of the LEI, will they be encouraged
to contribute to its more widespread use.
It is clear that the LEI offers many benefits and has widespread support. Some of you have been
working with the LEI from the outset and are strong advocates. However, it still has far to go to meet
the G20's objective.The FSB conducted a peer review last year to assess the current adoption and use
of the LEI. It came up with four sets of recommendations to support the broader use of the LEI.
Firstly, FSB jurisdictions should require the use of LEIs for the identification of legal entities in data
reported to trade repositories. This is a strategy that is already being pursued in Europe for derivatives
data and starting from April also for data on securities financing transactions. Jurisdictions should also
consider requiring the use and timely renewal of the LEI in reporting frameworks for a wider set of
financial market participants and infrastructures than is now the case. There are many ways
jurisdictions can promote the further adoption of the LEI. They should strive to make full use of the LEI
so they can reap all the benefits. The FSB will monitor the implementation of this recommendation as
part of its regular implementation monitoring activities.
The second set of recommendations is aimed at the FSB itself. The FSB should explore the potential
role of the LEI in different areas of activity. Work is currently underway to explore the use of LEI in the
resolution of financial institutions and on financial innovation issues, for example.
The FSB will work with standard-setting and industry bodies to facilitate LEI adoption. As well as group
entities and major counterparties of global financial institutions, the LEI should also be adopted by
CCPs' clearing members to support the timely analysis of risk exposures and interdependencies. The
FSB, working with other standard setters and the industry, will also promote the inclusion of LEI in
payment messages. It will also consider the benefits of the LEI in cross-border payments.
The implementation of the ISO 20022 standard will be a major step forward in this respect. Thirdly,
other relevant standard-setting bodies and international organizations such as the Basel Committee
and the IMF should review ways to further embed or enhance references to the LEI in their work,
which could facilitate the implementation of relevant LEI uses for both authorities and market
participants.
The fourth set of recommendations is aimed at the LEI Regulatory Oversight Committee and the Global
LEI Foundation. The FSB recommends that they consider improving the LEI business model to lower
the cost and administrative burden for entities. They should also consider data quality enhancements
to increase the reliability of LEI data and augment the scope and usability of Level 2 relationship data.
The FSB also recommends that the Global LEI Foundation works with industry and the public sector to
raise awareness of the benefits of the LEI. And it is against the background of that recommendation
that we are here in Amsterdam.
Let me conclude. With over 1.5 million organizations around the world now registered, the Legal Entity
Identifier has proven its value as the "one identity behind every business".
We have seen its benefits in different regulatory uses, for data analysis and increasingly for tracing
financial flows. Yet the benefits should be reaped even more broadly. The FSB has published a set of
recommendations in order to meet the G20's objective.
I am convinced the use of the LEI will expand in the coming years. Beyond securities and derivatives
trade reporting, and into other sectors. Because in a globally operating financial world it is clear we
need global standards.
This afternoon we have the opportunity to discuss how we can facilitate the further adoption of the
LEI. And to identify all the other valuable benefits it can bring. I hope everyone here today will seize
that opportunity. I wish you all a very interesting and productive afternoon.
Thank you