The Legal Entity Identifier (LEI) project, whereby every counterparty in a financial transaction is issued a unique code, is suffering from a lapse rate of 20% according to research from entity data provider Alacra.
The LEI Regulatory Oversight Committee states that more than 330,000 companies from 189 countries had registered for LEIs by the end of 2014. But up to a fifth of these have failed to renew their registrations, says Alan Samuels, vice president of counterparty and reference data at Alacra. Furthermore, says Samuels, the lapse rate appears to be growing, especially in the US.
Part of the reason for the high lapse rate is that some of the companies that registered for an LEI, such as badminton clubs and YMCAs, do not trade on financial markets and simply have no use for them. More worryingly though, says Samuels, is the fact that only 18% of the 67,000 rated companies that are active on financial markets have so far registered for an LEI.
While the use of LEIs is mandatory for swaps market participants, it is voluntary for other users. It also costs $200 in annual fees to keep an LEI registered and seemingly many of those that signed up, especially those that are not active traders on the financial markets, do not believe they are getting enough benefit from their LEI to warrant a renewal.
Another problem for LEI adoption is the fact that other entity reference codes schemes exist such as the Global Intermediary Identifier Number (GIIN). Furthermore these different codes do not cross-reference making it harder for data managers to track counterparties.
The low adoption and high lapse rates will be a blow to international regulators that have backed the project since it was first proposed as a way to improve transparency in financial markets and avoid a repeat of the mess that followed the Lehman Brothers default. Regulators also hope to broaden the use of LEIs beyond securities transactions to include the likes of tax referencing and anti-money laundering as well as encourage greater counterparty risk management.