Commerce is one of the many things that has been in existence for a very long time. Even though a part of the trade has changed, it still continues to date. Nowadays, almost every aspect of our lives is directly or indirectly connected to a business. The number of financial institutions that are being formulated is rising by the day. Business transactions normally occur on two levels; either business to consumer or business to business. When we focus on the latter, there are many things that should be put in place in order to facilitate smooth transactions between entities.
One ingenious plan that has been adopted to foster healthy business relations amongst institutions is by giving them a Legal Entity Identifier (LEI); here’s how it works. An LEI is a unique code that comprises of 20 alphanumeric characters which are allotted to legal entities. Thus, it becomes super easy to identify market participants since all the records are kept on one database. Legal Entity Identifier normally carries a firm’s public information including their name, address, the country they’ve been registered, etcetera. What’s more, the data stored on the system are reliable, current, and absolutely free to access.
Formation of Legal Entity Identifier
Given how LEI has garnered much traction, it has actually started to be a prerequisite for many international business transactions. Globally, there are approximately 1.5 million companies that have LEI. So, what are some of the benefits of Legal Entity Identifiers?
For you to answer this question properly, you’ll have to understand the thing that led to its inception. Before Legal Entity Identifiers came about, it was quite difficult for companies to know the whereabouts of a counterparty, especially during the global financial crisis. This situation placed many companies in a very difficult spot besides making a lot of transactions risky due to lack of transparency.
However, in 2011, the G20 came up with an ingenious solution to combat this problem. The idea was to build a digital database that’ll contain valuable information of all authorized entities. It also ensured that the data available on the system is accurate and easily accessible.
The Role of Global Legal Entity Identifier Foundation
Upon the formation of the Legal Entity Identifier, an organization known as the Global Legal Entity Identifier Foundation(GLEIF) was put in place to facilitate the smooth running of LEIs. The functions of GLEIF are to certify and track financial entities besides issuing Legal Entity Identifies. The institutions that carry out this mandate are called Local Operating Units.
The Local Operating Units can function on two levels; the first option is they themselves, issuing LEIs to institutions. Alternatively, they can also liaise with various registered agents who thereby issue the LEIs to companies. This method actually helps with the mass issuance of Legal Entity Identifiers besides popularizing the relatively novel mode of operation. Another great advantage of the Local Operating Units is the ability to fosters positive competition amongst the service providers.
Legal Entity Identifier Registration
In order for an entity to receive an LEI, there are usually minimum data required. The prospective institution has to provide the correct name as they appear in official registers. It also has to state the country where it was initially formulated besides providing any relevant addresses. Additional information such as the last time a company updated their information and the date of expiry may also be required.
The 20 alphanumeric characters issued to a company is normally divided into three segments. The beginning four characters normally show the information of the organization giving the LEI. From the fifth to the Eighteenth character are values that contain the specific details of a company. The final two characters contain the check digits. LEIs have truly changed how entities interact; however, this doesn’t give institutions a green light to utterly disregard the due diligence required before performing a transaction.
Legal Entity Identifier is one of the most revolutionary innovations that has ever been created in the 21 Century. It has opened a new realm of business transactions that offer safety and transparency. Acquire an LEI is highly recommended, especially in the current fast-paced world that we live in. Not only will it promote the growth of a business, but it will also facilitate more novel inventions within respective industries.