Why the LEI Code was created: MiFID II and MiFIR
Table of Contents
- What the LEI Code is
- MiFID II: Strengthening Investor Protection
- MiFIR: Increasing the Efficiency of the Financial System
What the LEI Code is
The LEI Code, which stands for “Legal Entity Identifier”, was introduced to provide a unique identifier at a global level for legal entities taking part in financial transactions. It was set up in response to the global financial crisis of 2007-2008, when regulatory authorities and financial institutions acknowledged the need for greater transparency and better identification of the parties involved in financial transactions.
The LEI Code has been developed under the coordination of the Financial Stability Board (FSB) and subsequently managed by the Global Legal Entity Identifier Foundation (GLEIF). It provides a unique identifier for any given legal entity involved in financial operations, allowing regulatory authorities and financial institutions to monitor risks more effectively and identify the parties involved in financial transactions.
The MiFID II (Markets in Financial Instruments Directive II) and the MiFIR (Markets in Financial Instruments Regulation) are two important European Union policies that regulate financial markets and the provision of investment services within the EU. They both came into force on 3 January 2018 and replaced the original MiFID, which was introduced in 2007.
Here is a brief overview:
MiFID II: Strengthening Investor Protection
The MiFID II is an extension of the previous MiFID I, introduced in 2007. This new directive aims to fill the gaps that emerged in the financial context after the 2008 crisis. One of the main aims of the MiFID II is to increase the protection of investors through transparency and the management of conflicts of interest.
One of the key changes introduced by the MiFID II relates to extension of its field of application. The directive covers a wide range of financial instruments, including derivatives and new categories of instruments. Investment companies are subject to more stringent requirements to guarantee that they are acting in the best interest of their clients.
Furthermore, the MiFID II has introduced new rules on pre- and post-negotiation transparency, requiring negotiation platforms to make certain information on financial transactions public. This helps to improve the visibility of markets and to guarantee a fairer environment for all operators.
MiFIR: Increasing the Efficiency of the Financial System
Parallel to the MiFID II, the Markets in Financial Instruments Regulation (MiFIR) was implemented to provide a more detailed and operative regulatory framework. The MiFIR is designed to promote the efficiency of financial markets and guarantee greater interaction among them.
One of the most significant characteristics of the MiFIR is the creation of a transparency regime for financial instruments negotiated outside regulated markets. This means that financial instruments, such as shares and bonds, must be negotiated on regulated platforms or the information on negotiations taking place outside those markets must be made public.
Furthermore, the MiFIR introduces the obligation to notify transactions, with the aim of improving market surveillance and preventing illegal practices such as insider trading and market manipulation.
More specifically, article 26 of the MiFIR aims to promote the adoption and the widespread use of the LEI Code to improve the identification of parties involved in financial transactions, thus contributing to transparency and the more efficient risk management in the financial sector.
