JP Morgan: New LEI scheme could make codes cheaper

A reference data expert at JP Morgan says a new program for distributing the Legal Entity Identifier (LEI)—the alphanumeric code that identifies counterparties to a transaction—could drive down the cost of the code for market participants that want to sign up for one.

Currently, legal entities pay about $100 for a new code, though the price differs depending on the local operating unit (LOU) they use. LOUs are the organizations accredited to generate and assign the codes. Entities must also renew the codes annually, or they become “lapsed”, and that cost ranges from around $62 to $280. 

The London Stock Exchange’s LOU, Unavista, for example, charges £90 ($125) plus Vat for a code, and an annual maintenance fee of £65 ($90) plus Vat per LEI, according to their website. Nasdaq charges €69 ($83) plus Vat and LEI renewal at €59 ($71) plus Vat.

For a single entity, those costs might not be prohibitive, but for a large organization with multiple legal entities under its umbrella, they can mount up, particularly as adoption of the code increases. “When you have volumes of LEIs in the hundreds of thousands or, hopefully, at some point in the millions, even $100 per LEI is a lot of money. It gets expensive,” says George Brandman, a managing director in the digital and platform services division of JP Morgan.

JP Morgan was the first firm to sign up as a validation agent under a new scheme implemented by the Global LEI Foundation (Gleif), the LEI’s managing body. Brandman hopes the validation agent scheme will help make LEIs cheaper by reducing the costs of producing them. That, in turn, should drive adoption of the code, which has been uneven globally.

“We will see the costs come down as we get scale,” he says.

The Gleif’s scheme, introduced in September 2020, creates a new type of role within the LEI system, called a validation agent. Under this scheme, financial institutions such as banks or asset managers that sign up to be validation agents can obtain LEIs from the LOUs on behalf of clients during their standard know-your-customer (KYC) and anti-money laundering (AML) onboarding processes, or when refreshing existing clients’ details.

We will see the costs come down as we get scale

George Brandman, JP Morgan

In JP Morgan’s case, the bank has contracted with the Depository Trust and Clearing Corporation, which operates an LOU, to acquire LEIs for clients.

This new system spares the client the burden of obtaining the LEI itself. As for the validation agent, the Gleif hopes it will benefit from improved internal data management capabilities and more efficient KYC/AML processes. Also, the Gleif said last year that validation agents can advertise the LEI as a sweetener on top of existing services, to “capitalize on additional opportunities to add client value and achieve market differentiation.”

This is exactly what JP Morgan has done, as it is offering the LEI to customers at no extra charge. Brandman says the bank is offering the code for free, at least initially, as the LEI will not get cheaper until it is adopted en masse. “It will never cost less until we do it. That is why we have taken this approach to get it off the ground and show the value,” he says, adding that the bank wants to demonstrate to other firms that the LEI has value to them, and to their customers.

Brandman adds that, in its new role, the bank can leverage its normal KYC identification processes to acquire an LEI for a customer. “There’s no additional work for us to internally gather the information that we need to request an LEI on behalf of the client,” he says.

Brandman says the benefits of the validation agent role extend beyond just streamlining KYC/AML tasks to more accurate and up-to-date reference data more generally. Every bank has extensive software systems that match legal entity information to external references, such as government agency data or third parties providing information on payment records. Having LEIs on more of its customers means the bank can now cross-reference more easily between external data vendors.

As the volume of LEIs increases, the fixed costs associated with the generation of LEIs will be distributed across a larger population and the price will naturally go down

Stephan Wolf, Gleif

“So the LEI, in a way, becomes the lingua franca or the Rosetta Stone across external data sources,” he says.

More broadly, the Gleif hopes the validation agent model will incentivize global adoption of the code. Gleif CEO Stephan Wolf says it will contribute to lowering the costs of obtaining an LEI. “As the volume of LEIs increases, the fixed costs associated with the generation of LEIs will be distributed across a larger population and the price will naturally go down,” he says.

Essentially, the validation agent takes on the work of assigning an LEI from the LOU, reducing duplicative effort. Currently, LOUs must fill out multiple fields of data to produce a new LEI. Firms obtain much of that data from clients during onboarding anyway, and reducing that effort for the LOU should, in theory, reduce costs at the LOU. The more firms that sign up to be validation agents, the more pronounced the cost savings.

Last week, the Gleif confirmed that the China Financial Certification Authority, a national authority of security authentication approved by the Chinese government and central bank, is the newest validation agent under the scheme. 

The LEI concept was introduced in 2012 in the wake of the global financial crisis, to introduce more transparency to the financial system. Its uptake by legal entities across the world has been uneven and largely incentivized by regulatory mandates. Where regulators mandate LEIs to identify counterparties in trade and transaction reporting, for example, adoption rates tend to be high. But its proponents believe the true benefits of the code, whether for reducing systemic risk or increasing efficiency in financial transactions, will only truly be realized once there is a critical mass of up-to-date LEIs.

At the end of Q1 2021, the total LEI population was about 1.77 million, according to the Gleif’s own statistics. Recent issuance is concentrated in the EU, where regulation has tended to be stricter than other regions in mandating the LEI, and in emerging markets, where regulators are beginning to mandate the codes, and for competitive reasons.