Current status of the LEI-system
The global LEI system came into existence after a request from the G20 countries after the financial crisis. This is the LEI system that we know today - with the MiFIR regulation and the MIFID II directive - that makes it mandatory for all legal entities to have an LEI code in order to trade in securities.
The G20 countries recently put forth a series of recommendations for the FSB to promote broader LEI adoption. This new request specifically pertains to cross-border payment transactions.
LEI codes and cross-border payment transactions
On 7 July 2022, the G20 countries sent a report to the Financial Stability Board (FSB) outlining suggestions to improve the LEI-system. The report explores the benefits of LEIs in cross-border payment transactions, a topic that has been debated for some time. By creating a unique global identifier for payment transactions and information about accounts, the LEI system can help improve compliance and address data handling issues.
The FSB will review progress in the implementation of the recommendations and publish a progress report by the end of 2024. This report will also include a review of progress in implementing the recommendations of the LEI peer review. The LEI peer review shows FSB’s commitment to broaden the use of LEI codes.
Benefits of an LEI system for cross-border payments
Just like the LEI system creates transparency on the financial markets, it could do the same for cross-border payment transactions.
Limited standardization, poor data quality, and fragmentation in data sources cause complexity when making cross-border payments. A standardized identity system could serve as a solution to these challenges, partly by use of common message formats and standardized data, which the LEI system provides.
GLEIF writes in one of their reports that cross-border payments are managed by a network of banks that ensure that the payments reach their destinations.
However, this does not happen with the same transparency, efficiency, speed, and cost as domestic payments. For multinationals and big financial institutions, for instance, it’s not the transaction fees that are the problem, but the uncertainty and potential risks with delays.
B2B cross-border payments have a lot of fragmented regulations and local standards. This is specially a problem for developing countries, where local systems for entity identification are hard to get access to and lack a quality standard.
How LEI codes can help
The Financial Stability Board (FSB) writes in their Stage 2 report to the G20 countries:
“Setting a common vision and aligning with international rules and standards across borders in international policymaking and domestic legislation can help influence the impact of the operational enhancements set out in focus areas B (Coordinate regulatory, supervisory and oversight frameworks) to D (Increase data quality and straight through processing by enhancing data and market practices).”
In Building Block 16, the report suggests that the LEI system can help solve these issues to improve compliance processes and handle data issues. The ability to uniquely identify any legal entity and identify beneficiary and originator in payment messages would help compliance processes significantly.
G20 on enhancing cross-border payments
This is part of the building format of the G20 roadmap for cross-border payments.
The G20 roadmap addresses the key challenges faced by cross-border payments, such as high costs, low speed, limited access and insufficient transparency. The roadmap provides a plan in the form of 19 building blocks with achievable goals in order to make cross-border payments faster, more secure, and cheaper. This will have an impact on both businesses, citizens, and economies globally.
A key building block in the roadmap is “Establishing Unique Identifiers with proxy registries”, where the LEI system is indeed relevant.
LEI codes mandatory for cross-border payments in India
The Reserve Bank of India, RBI, has already made it mandatory for all companies making transactions above 50 Crores to have an LEI code.
This happened as of October 1, 2022. It was announced in a statement by the Reserve Bank of India, and holds for all entities using Reserve Bank-run Centralised Payment Systems viz. Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT).
You can read more about LEI numbers and cross-border payments in India on RBIs webpage.
It is the remitting bank that needs to assure that both the receiver and sender have an LEI. This improves risk management and financial data accuracy.
India is the first country to make it mandatory for legal entities to have an LEI number for cross-border payments. It is expected that other countries will follow suit in the near future.