Understanding LEI Numbers for US Companies: What You Need to Know

Paid content in partnership with the Bazoom Group. The information in this article is not intended to be financial advice.

It is a fact that the financial world is more integrated and complex than ever before and this calls for accountability. One of the most important measures that help to provide such transparency in the financial sector is the Legal Entity Identifier (LEI). For the US firms that are part of any financial activity, LEI is no more merely a compliance need but a necessity to be recognized in the international market. However, what are LEI numbers and why is it crucial for the US companies to have them?

Now that we are set to get into the details let us first look at what LEI number for US companies entails. An LEI number is a 20-character alphanumeric code that is used to identify legally entity that is involved in financial transacted across the globe. The LEI system was introduced after the 2008 financial crisis which saw the absence of a common architecture for identifying legal entities across the world to hinder efforts of tracking risks and linkages. The LEI number assists the regulators and market participants to identifying the counterparties to the transactions and thus mitigates risks in the global financial system.

LEI Number: What You Need to Know

An LEI number is recognized globally as a unique identifier for entities participating in financial transactions. This encompasses companies, state departments, and non-governmental organizations, among other legal bodies. LEI is essentially the unique identifier for every company or organization that has a role in the financial markets.

An LEI has a predefined format and a coding format comprising 20 characters. These characters are divided into three distinct parts: The first four characters are for the Local Operating Unit that has issued the LEI, the next 14 are entity-specific, and the last two are check digits that help validate the LEI. This is because this format helps in tracking as well as managing entities across various jurisdictions and financial systems.

What is an LEI Number and Why Do US Companies Need It?

This is because the LEI number is becoming more and more important for US companies. The use of an LEI is mainly compelled by regulations from both American and global jurisdictions. One such rule is the Dodd-Frank Act, which was passed into law in the aftermath of the 2008 financial crisis to have made it mandatory for the entities involved in certain financial transactions, especially those involving derivatives and securities, to obtain LEI numbers.

An LEI number is required because there is a need for a standard and unique identifier for entities in the financial market. Through the use of LEIs, regulators, financial institutions, and other market players can identify and monitor the entities that they are engaging with. This transparency is useful in minimizing systemic risk and hence enhances the stability of the financial system.

Besides, possessing an LEI number adds to a company’s legitimacy and strengthens its status in the international market. This reveals that the company is in compliance with international standards and is very much aware of the importance of disclosing the company's financial transactions. This can be particularly useful for organizations that have their business across different countries or have interaction with clients and partners from different countries.

A Guide to LEI Number for US Companies

To get an LEI number one has to go through a simple process. US-based entities can obtain an LEI from a Local Operating Unit (LOU) which has been approved to issue LEI codes. The most common information that usually needs to be submitted when applying for certification includes; the name of the company, its physical address, its registration number, and that of its parent company if any.

After the application has been made and is processed the LOU will provide the LEI number. This number is then stored in a global LEI database which can be used by regulators, financial institutions and other market actors. To this end, the LEI is valid for one year after which it has to be renewed to ensure that the information provided is still relevant and up to date.

The cost for an LEI number may differ with the LOU and the services provided in the process. Some of the LOUs have extra services that can include helping with the application process or helping in case of appearance of any problems concerning the regulatory aspects. Nonetheless, the advantages of having an LEI number are numerous especially to companies that engage in cross-border business activities.

It is important that you get to know about the advantages that are associated with having an LEI number. The first and the most important advantage of obtaining an LEI number is the fulfilment of regulatory needs. If an LEI, US companies may not be able to do business or may be subject to fines for non-compliance. This therefore makes the LEI a very crucial instrument that any company that has dealings with the financial market must have.

Conclusion: Future of the LEI Numbers in the United States of America

With the world’s financial system being more interlinked than ever, the use of such standardized identifiers like the LEI will continue to rise. Thus, for US companies, LEI is not just a number that needs to be acquired and renewed but a tool which helps them in establishing their integrity and market image.

The process of obtaining an LEI is simple and the advantages that one gets from using it in terms of enhancing transparency and compliance not forgetting the efficiency makes it very valuable for any company dealing with the financial markets. In the future as more and more entities adopt the use of LEIs, those firms that are using it will be in a better place to manage the challenges that come with the global financial system and make the best out of it.

In today’s world characterized by an increased focus on the principles of transparency and accountability, the LEI number for US companies is a very powerful instrument that helps these companies address the challenges of the contemporary financial environment. Whether a small business wants to tap into the international market or a big company is involved in several financial activities, getting an LEI number is very useful.

Paid content in partnership with the Bazoom Group. The information in this article is not intended to be financial advice.