Thank you Santa, you have delivered the first wish on our Christmas list – a solution for firms with clients without LEIs!
Well…kind of. ESMA has blinked first but late in its long standing game of Chicken with the industry and today announced it has relaxed its approach on the LEI requirements for reporting entities and issuer of financial instruments. There was very little wriggle room for ESMA as it has no powers to amend the regulation and instead has had to relax one of the validations and pass on significant operational difficulties to firms and trading venues.
ESMA recognises industry concerns
In its statement, ESMA recognises three key concerns of the industry. First, that firms will not succeed in getting LEIs for all of their clients prior to 3 January 2018. At the same time, it acknowledges that these clients will still approach firms to trade with them post 3 January regardless of not having an LEI. Finally, trading venues will face similar problems with non-EU issuers who will not have obtained LEI. There is a fourth issue of handling corporate actions for clients without LEIs. These are issues that Kaizen reflected previously in our blogs and publications and ESMA has now been persuaded by the consequences of the LEI obligations. In short, the LEI mandate would result in a scenario where clients without an LEI have no option but to trade with a US located bank or venue resulting in a material outflow of business from the EU financial system.
A Christmas gift but not for life…
ESMA’s proposal is a temporary but messy solution so as not to breach the regulations. For a period of six months from 3 January, investment firms and trading venues can continue to provide trading services to clients without an LEI that would trigger a transaction reporting obligation. But only if two obligations are met:
- The investment firm obtains the necessary documentation from the client to apply for an LEI on the client’s behalf
- The trading venue reports its own LEI instead of the LEI code of non-EU issuers whilst reaching out to them to get one
Investment firms will have to apply immediately for the issuance of an LEI on behalf of the client and then submit all required reports for that client once the LEI has been issued. ESMA and the NCAs accept that this solution will cause a delay in reports being made and they will actively monitor the timeliness of late reports. At the same time, they will amend their validation rules to allow the acceptance of transaction reports where LEI issuance date is after the transaction reporting execution date. But the FCA have already communicated that they will not be able to make this change for the 3rd January!
ESMA and your Grandma
Like Christmas presents from your Grandma, ESMA’s LEI ‘present’ is well meaning but does not quite hit the spot. Worse of all, it doesn’t come with a receipt that will allow you to exchange for a better gift. The effect upon firms is a messy one:
- Outreach: Firms will have to, at short notice, reach out to clients to obtain the required data to register them for an LEI and what happens if the client doesn’t want to play?
- Register and pay for LEIs: Put in place a process at short notice to process LEI requests
- First Mover Disadvantage: Those firms who respond first will end up paying for LEIs that then also benefit their competitors
- LEI Duplication: Although the GLIEF system is meant to prevent duplication of LEI issuance, it will likely face its greatest test as multiple firms apply on behalf of clients
- Excluding Reports: Firms will have to put in place processes to identify and exclude transactions without LEIs and then report once the LEIs issued
- NCAs not ready: The FCA have already said they will not be able to make the validation changes in time, meaning that they will reject reports even if they follow process outlined by ESMA
- ARMs and firms not ready: ARM validations and for some firms their own internal validation processes will have to be altered to allow the historic reports to be submitted with newly minted LEIs.
So – not quite the present we all wished for and we may well be left scratching our heads in January wondering how to put it together and make it work. Fingers crossed we have better luck on our other nine items on our Christmas wish list…