Blog. Part 1: A Brief History of LEIs…
PublishedThe world’s most valuable resource is no longer oil, but data (Economist, 2017). Over 2 billion people born since the year 2000 are digital natives – people whose lives on and off-line are one and the same. We live, learn, date and work in a digital world that is emerging around us and rules and regulations that will maintain law and order are slowly adjusting to the new reality.
When people started to trade (and the first recorded long-distance trade is attributed to 3000BC between Indus and Mesopotamia), people sought to establish the rules of fair play. Our current laws of international trade originate directly from medieval lex mercatoria and lex maritima (“laws for merchants on land” and “laws for merchants at sea”). Setting universal rules and practices allowed traders to settle disputes quickly and effectively without a long and costly court procedure.
Today, trading takes place online. After the bankers took securities exchanges and clearing into the digital world in the 1980’s – all other markets followed. Rice, sugar, live pigs, frozen orange juice concentrate, even weather and carbon emissions are traded online on commodity exchanges (google it at your leisure). Physical on the spot market trading where money and goods exchange hands at the same time is safest and fastest – you can see who you are dealing with and can get the money immediately. Any delay in payment or delivery of goods raises inevitable questions of trust. Will I get my end of the bargain?
Trust is what we have to have when we do not have control. By collecting information about the other party we can estimate trust based on what we know. Before the frantic days of the internet and dematerialized trade, you’d rely on someone’s reputation, which is a social shortcut helping you to make a decision about a deal. You’d ask your contacts about past dealings with a person and make your decision based on their responses and your gut feelings.
This luxury is impossible when your trading partner is on the other end of a fiber-optic network. Global companies have complex legal entity structures with branches and subsidiaries in different countries, with names that do not suggest any sort of relationship. You might think that you trade with several suppliers across the globe, but if a parent company goes under you might find out that you only ever had one.
If a trade goes sour, would you know how to contact the legal entity that you were dealing with? Resolving trade disputes under any international law relies on knowing who the other party is. Regulators woke up with a great headache the morning after Lehman Brothers collapsed in 2008 because when they asked the bankrupt company “who do you owe money to?” the answer was a long silence and almost 10 year-long investigations to unwind all of its business as 80 separate subsidiaries in 16 different countries had to be closed down.
Twelve years on from the crisis the world regulators are working on preventing the next one – by making sure that trading companies can answer simple questions of who their trading partners are, where are they registered, how many trades they did. Those are simple questions, but modern complexity in contractual relationships, the ability to shop around for the best legal base for your company – make the answers more important.
Markets in Financial Instruments EU directive, European Markets Infrastructure Directive, US Derivatives Regulation Reform – global rules have changed and continue changing and luckily technology is here to help. Knowing who the market participants are is a great step forward – it protects you, your deals, and your business, as it gives you a trusted source of that information. Globally.
Legal Entity Identifiers (LEIs) give you back trust in your trading partner, based on the knowledge that every issuer is backed by national and international law to know their customer. You have to use LEIs for trading on any digital exchange, more and more companies are using LEIs in their legal contracts off-exchange, because of the legal certainty it gives.
Data is the most valuable commodity and in the digital world, LEIs are your trusted partner status.