Asia warned of LEI crunch over Mifid II deadline

Tens of thousands more Asian LEIs needed to avoid European trading lock-out in January

issuance crunch
Asian counterparties warned of dangers of last-minute rush for LEI

Thousands of counterparties in Asia are being warned they risk being unable to trade with global banks from January 2018 if they wait until the last moment to acquire a legal entity identifier (LEI).

“There is no guarantee that if one waits until year-end to get an LEI, you will be able to get it,” says Steven Meizanis, head of entity content management at Bloomberg, which is a local operating unit (LOU) licensed to issue LEIs. “The volume will be dramatically increasing over the next few months with December being the heaviest. It's first come first served, and if you wait you may lose out. Without an LEI, you will have disruption in your trading and reporting capabilities, thus crippling your firm.”

Europe’s second Markets in Financial Instruments Directive (Mifid II) comes into force from January 3 next year. It applies directly to firms operating inside the European Economic Area (EEA), but it is increasingly drawing in third-country counterparties.

Any entity regulated under Mifid II will be forbidden to trade with a counterparty that does not have an LEI, whether the counterparty is based inside or outside the EEA. While the process of obtaining an LEI is theoretically fairly simple – the application typically takes no more than a few days and should cost little more than €100 ($119) – concerns are growing that if everyone leaves things to the last minute, LOUs may not be able to cope.

Like many LOUs, Bloomberg has spent the past year updating its systems to be able to cope with the expected surge in LEI requests. But LOUs cannot automate all aspects of the allocation process. Meizanis points out that the bottleneck is in the manual steps that need to be taken in order to verify the information that is submitted during the LEI application process.

“Technology is applied to processes where it makes sense to do so. When someone registers to get an LEI, we apply what programming we can, to check the authenticity of that entity. The manual aspect comes into play when we verify the supplied data against a source such as an article of incorporation, to ensure the data is correct for example,” says Meizanis.

Global banks have been talking to their clients in Asia about the need to get an LEI for well over a year, but there is concern that many of them are leaving things too late.

“We’ve been telling clients for the past 18 months that Mifid II is coming in – that they need to get ready and that the LEI will be critical,” says one senior regulation expert at a global bank based in Hong Kong. “There is more awareness today, but many people still aren’t thinking about how they will be impacted by Mifid II. I don’t think there’s a fundamental difficulty in terms of the logistics of getting an LEI in quite the same way as there was, for example, in preparing for [non-cleared swaps] margin. But the problem is that if you suddenly get thousands of applications within a week, I guarantee that’s not going to work.”

One problem may be that there is still a great deal of confusion about who might end up in the scope of the new rules. One senior currency trader at a global bank says that quite often different banks may tell the same entity different things.

“This often leads to a situation where a client is told by one bank that they will not be caught by Mifid II, while another bank [which the client also uses] might consider that they do fall in scope. Such confusion can result in inertia,” says the currency trader.

The International Swaps and Derivatives Association estimates that tens of thousands of Asian organisations need to obtain LEIs ahead of the January implementation deadline, if they are to continue trading with European banks. Less than 5% of the 530,000 LEIs that have so far been issued around the world come from Asia, according to Isda.

Although Mifid II is a European initiative, it is also likely to hit the clients of many US banks that choose to book their Asian derivatives trades in London rather than New York.

“Market participants, stakeholders and industry associations, such as Isda, are already reaching out to Asian entities and have been for some time now to try to minimise the likelihood of a sudden rush for LEIs later,” says Keith Noyes, Isda’s regional director. “[This] primarily involves educating clients about why they will need an LEI going forward, as there are no local LEI requirements in this region, apart from India [and Singapore].”

Regulatory drivers

The regulation expert at the global bank says that the preparedness of firms in the region varies from jurisdiction to jurisdiction, with those that are used to reporting via a trade repository – such as Australia, Hong Kong, Japan and Singapore – already being familiar with the LEI concept.

“For the likes of Thailand, Korea, India and Malaysia – where regulatory reporting has been in place for years and things have not had to go through a trade repository – the LEI is more of an alien concept,” he says.

Things may be changing in some parts of Asia, though. Last year, the Korean exchange (KRX), advised by the Depository Trust and Clearing Corporation (DTCC), established a trade repository, with a view to mandating the use of LEIs going forward. On June 1, the Reserve Bank of India (RBI) issued new legislation that will require all entities that trade over-the-counter derivatives to obtain an LEI before they can trade.

“LEI registration is the result of regulatory compulsion, so we see LEI registration concentrated in jurisdictions with regulation,” says one person responsible for overseeing LEI registration at a global LOU. “Mifid II clearly mandates the use of LEIs for the party and the counterparty, so we can expect an increase in the registration of entities domiciled in Asia.”

Data from Thomson Reuters shows how LEI issuance spiked up in February 2014 (see chart), ahead of new rules for all derivative trades to be reported under the European Market Infrastructure Regulation (Emir). Wenlin Juang, head of pricing and reference services for Thomson Reuters in Asia, expects a similar trend to be seen as the implementation deadline for Mifid II approaches, including in Asia.

“We are expecting some movement, probably after September when people have to make a decision on the service provider and getting ready for Mifid II,” she says.

In practice, Emir obliged only European counterparties to apply for an LEI, so the numbers involved this time may be even higher. India and Singapore are so far the only countries in Asia to mandate the use of LEIs in derivatives trade reporting, while Hong Kong and Australia have encouraged their use.

Following the introduction of new rules in India that mandate the use of LEIs for over-the-counter derivative transactions, LOUs in the country have reported a noticeable increase in LEI applications. However, Anupam Mitra, head of derivatives within the trade repository and LOU of the Clearing Corporation of India (CCIL), which is the largest issuer of LEIs in the country, says that this sudden surge is manageable because of the staggered way in which the RBI has chosen to implement the new mandatory system.

According to the RBI circular, the introduction of the new LEI rules will be implemented in four phases between August 2017 and March 2018. The point at which an entity becomes subjected to the new rules depends on their relative size.

“One of the most worrisome issues about Mifid II is that there is a singular deadline and what happens if you have a single date for all entities is that they tend to crowd around that date and that then becomes operationally very difficult for LOUs globally to address,” says Mitra. “In India, we won’t have a single spike but rather different spikes throughout the year, which is much easier to manage.”

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