Pakistan Need to Adopt LEI to Prevent Financial Crisis

If you are not familiar with Legal Entity Identifiers you better should as the world moves to a digital future. LEIs or Legal Identity Entity Identifiers are universal identifiers that can recognize all legal entities participating in financial transactions.

The LEI database is managed by Global Legal Entity Identifier Foundation (GLEIF) and is transparent to everyone and gives a global access to legal identities around the world. Each LEI code contains information about the entity’s ownership and gives complete insides of the organization. The LEI code provided by GLEIF is like a bar code that is designed to enable risk managers and regulators to identify parties to financial transactions instantly and precisely. Through LEIs, private sector investors and regulators can understand the true nature of risk that the organizations will be taking in investing in an entity. 

Private industry tried for 20 years to make this global entity identification possible, but it failed several times. Global LEI system was considered after the severe worldwide economic crisis in 2007. Leaders operating through G-20 and Financial Stability Board (FSB) agreed to develop such system that will be followed globally. Sharing a country’s database with the whole world seemed challenging at first but later in 2010, representatives from the financial industry welcomed the call, responded with a proposed solution, and worked together through the FSB to develop a global LEI system. In 2013, the responsibility for overseeing the global LEI project was handed over to the Regulatory Oversight Committee and the committee members agreed to appoint an official of Office of Financial Research (OFR) as the first chairman of the global financial project LEI Register. 

The OFR is currently working to expand the use of LEI as it plans to list every entity on the planet. Once LEI is grown to masses around the world, it would be helpful in cutting cost and improving risk management for individual firms and also all investors around the globe. Less transaction failures will be observed once this system is adopted by other countries around the world. Other benefits of the Legal Entity Identification system include lowering data reconciliation, cleaning and aggregation cost resulting in trimming regulatory reporting cost.

This system still doesn’t exist in Pakistan, nor many have heard of it but once it become a common term, the system will provide a long-term benefit to companies by identifying the firms they transact with, and also the customers they are serving causing less risk of loss. Estimates claim that if the system is effective and adopted globally, it would be able to save financial sector from a loss of $300 million to $10 billion.