The full form of the abbreviation LEI is Legal Entity Identifier. LEI is an alphanumeric code which is unique to every registered legal organization. It is a code of 20 characters. It is supported by GLEIF – Global Legal Entity Identifier Foundation.
As mentioned already, LEI is a unique code. Legal Entity Identifier code cannot be obtained directly. GLEIF has put local operation units – also known as LOUs – in place for providing the LEI code. LOUs are LEI issuing organizations.
LEI is important for several reasons. The following article looks at some of the most important reasons.
It provides unique identification
Ever since the financial crisis of 2008, the world felt the need of a way that standardises all legal entities. The standardization of legal entities will create a common way for identifying the entities. LEI was that standardization concept which made it happen.
The amount of transactions happening between legal entities is humongous. In a world where there are so many legal entities and many more up and coming, the need for identification and a standard regulation is must.
The unique code provided by LEI marks every registered legal entity. Thus, everyone is differentiated and the data related to each and every one of them is also marked.
It provides transparency
Another reason why LEI is important is transparency.
As mentioned already, the pool of companies involved in transactions on a daily basis is humongous. Without LEI you won’t be able to keep a tab on companies.
The transparency provided by LEI is useful in a lot of ways.
Firstly we get to know what is happening and between whom is happening.
Secondly we get to know how much is happening and how much has happened.
This is very useful information. With this other organizations can assess the risk involved in the investment and overall portfolio of another entity.
It provides risk assessment
Proceeding forward from the last section. Risk assessment is a crucial aspect when it comes to investment and economy.
The financial crisis of 2008 taught everybody a lesson.
LEI provides a history of the transactions between legal entities. This way no entity can hide their debts and the risks involved in them.
Before LEI the system was not transparent. Companies could window dress and become more volatile than before. LEI is a step towards that in ensuring that past mistakes do not repeat again. More and more countries are now incorporating it into their economic structure.
Conclusion
So LEI is important because it gives a unique code to all the legal entities. LEI keeps the records of their transactions and the transactions are transparent. The transparency provided by LEI is useful in many senses. Especially when it is about assessing debts and risks.
All companies need to register for this code. To obtain LEI code, you can visit the LOU websites or find an agent who can help your company register. Agents will take care of the whole application process and save you the time and energy.