LEI code – new obligation for companies that hold securities

Companies trading with financial instruments should apply for an LEI code now, as in the absence of one they are not able to buy and sell securities listed on stock exchanges as of 3 January 2018. It means that all companies who trade assets such as shares, bonds or derivatives on securities markets through an investment service provider (such as banks) will have to apply for an LEI code.

As of 3 January 2018, an LEI code is required for companies that carry out transactions either in a trading venue[1] or outside a trading venue in connection with financial instruments which are admitted to trading or traded on a trading venue or for which a request for admission to trading has been made, as well as if the underlying is a financial instrument traded on a trading venue or an index or basket composed of financial instruments traded on a trading venue.

The basis for the LEI code requirement is the Markets in Financial Instruments Directive 2014/65/EL[2] (MiFID II), which comes into force on 3 January 2018. The directly applicable regulation (EU) no. 600/2014[3] (MiFIR) will also come into effect. Pursuant to Article 26 of the MiFIR, all investment service providers will henceforth have to report certain securities transactions ordered by clients.

The LEI code – the Legal Entity Identifier– is a globally used code for identification of companies, consisting of a 20-digit alphanumerical code. We draw attention to the fact that this is a code used to identify legal persons – private individuals do not need the code and indeed it is not issued to them. Each LEI code is unique and exclusive; it is assigned to each company on a one-time basis and the same code cannot be reassigned to anyone else. The LEI code does not replace, nor is it equivalent to, the Estonian Commercial Register code.

Why is the LEI code required and what happens if my company does not apply for one?

The LEI code associates the company with their primary information (name, location etc.). The LEI code can be used to identify companies participating in global financial markets for supervisory purposes. As of 3 January 2018, the LEI code will be used on basis of the MiFIR, in connection with reporting investment service providers’ security transactions to supervisory bodies, by using the LEI code to identify clients that are companies. Transaction reports are used in order to identify and investigate market abuses and for monitoring transactions and investment service providers’ activities. The form for the transaction report is established by European Commission implementing regulation.

If a client who is a company fails to submit to its investment service provider information necessary for reporting security transactions, including the LEI code, the service provider will be unable to discharge its reporting obligation under law. As a result, the investment service provider may deny providing services. It means a client who is a company will be unable to execute transactions involving securities listed on an exchange.

Applying for the LEI code 

Currently no service provider in Estonia issues LEI codes. For that reason, an issuer operating in another member state must be contacted. The LEI code is also in use outside Estonia. There is a fee for applying for the LEI code (about 100 euros) and the process takes about a week. An annual fee may also apply.

See a list of LEI issuers here. 

Grant Thornton Baltic has sought LEI codes for its clients via the WM-Leiportal. The first-time registration costs 80 euros through this site, and the code is good for one year. Extending by one year costs 70 euros. A number of LEI code issuers charge over 100 euros in service fees.

Author: Henri Parisalu