The introduction of new rules governing the global identities of financial service entities is looming. Directors of corporate trustee SMSFs that transact with Europe must be compliant before January 3, 2018.

The new identification system has an initial requirement that companies in Europe, and the companies they trade with, acquire a legal entity identifier (LEI).

Canberra-based APIR Systems, which has partnered with the London Stock Exchange to provide LEIs domestically, says the legislation is “relatively new to many Australian companies and potentially affects a broad range of financial services”.

APIR Systems will charge a fee of about $250 for each LEI registration that it processes.

The financial entities that will be affected include not only funds, brokers and businesses that trade with European counterparts, but also directors of SMSFs that have corporate trustees. The European Securities and Markets Authority (ESMA) has stated that after the LEI acquisition cut-off date in early January, “firms should not trade with counterparties that do not have an LEI as they will not be able to submit valid transaction reports”.

APIR Systems chief executive Chris Donohoe estimates that of the 600,000 SMSFs in Australia, the new requirement will affect roughly 5 per cent – or 30,000 funds.

Donohoe says the lack of LEI awareness in the domestic financial services market is alarming. “The potential impact of these new regulations is still not fully understood by some financial services participants in Australia,” he says. “In short, while MiFID II does not directly regulate Australian entities, it can affect them.”

‘MiFID II’ refers to the second iteration of the Markets in Financial Instruments Directive, which legislates the new identification system. The original MiFID framework has been in place since 2007.

The genesis of MiFID II, Donohoe explains, goes back to the global financial crisis (GFC) and the various swaps and contracts that were left “at the bottom of the heap”.

“What became apparent,” he says, “was a lack of understanding about who the counterparties were in these transactions. As G20 looked to subsequently bulletproof various parts of the global marketplace, they developed a 20-digit alphanumeric code to bolster identification protocols. The movement sprouted in the US, but was very much driven by Europe after the Global Legal Entity Identifier Foundation (GLEIF) was founded in Switzerland in 2014.”

GLEIF does not directly issue LEIs, but delegates this responsibility to local operating units (LOU). APIR systems, Donohoe explains, has partnered up with the London Stock Exchange to issue LEIs domestically after finding the compliance costs of being a dedicated LOU too onerous. For local companies, he says, obtaining an LEI is relatively quick and easy.

“We can turn one around in about five days,” Donohoe says. “We just need an ABN and proof of legitimacy. Once the data has been taken care of we can provide the number.”

Although the initial uptake has been remarkably slow, Donohoe has seen a recent increase in interest and engagement.

“We have been inundated with requests,” he says. “Funds, platforms, traders and SMSF trustees are all looking for information on what it means for them.”

Despite the market disruption and some minor panic from those affected, Donohoe firmly believes MiFID II will go a long way to preventing the kind of conditions that led to the GFC.

“Once adoption takes off, this kind of a uniform coding system will enhance the security of our global financial market considerably,” he says. “The original objective of the G20 is on track there.”

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Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.