In a blog post on the benefits of LEIs, Reed described how the system “now serves as a linchpin for making sense of derivatives data stored in repositories around the globe”.
Reed noted that early academic studies found cost savings associated with adoption of the LEI approached $1 billion annually.
Regulations that require the use of LEIs, such as the second Markets in Financial Instruments Directive (MiFID II) are also expected to create cost savings and greater transparency.
However, the blog post also highlighted that the long-term benefits to financial stability from an LEI system are much harder to gauge.
“This 20-character code allows the precise identification of these firms regardless of who is seeking to identify them or where they reside,” said Reed.
“As a basic building block of the global financial plumbing, the LEI improves companies’ risk management, clarifies counterparty exposure, and allows government supervisors to better assess market functioning.”
He added: “The LEI also enables easily combining information from different sources. In addition, the LEI answers two basic questions: who is who, and who owns whom?”
Reed noted that the lack of LEIs before 2007 prevented regulators and private-sector risk managers from seeing the total extent of exposures by market participants to Lehman Brothers.
As noted in an OFR brief earlier this year, without a basic ability to identify financial market participants and their corporate families, financial companies and the regulators supervising them would continue to struggle to understand the links and exposures throughout the global financial infrastructure.
A recent report by McKinsey and Company and the Global LEI Foundation found that at least 10 percent of operating costs for onboarding clients and trade processing could be eliminated with full adoption of the LEI.
Another $500 million could be saved by the investment banking industry in issuing letters of credit. Additional savings can be found in business cases explored in the study.
Reed’s comments come a month after the European Securities and Markets Authority (ESMA) warned industry participants not to neglect a viable method to comply with the fast-approaching LEI requirements.
ESMA stated that the introduction of LEIs under MiFID II will improving market surveillance and transparency and play a key role in the new harmonised data-reporting regime.
In a statement on the LEI requirement, Steven Maijoor, chair of ESMA, stated that there is no room for negotiation, where LEIs are concerned, under the incoming MiFID II rules.
Maijoor said: “LEIs play a key role under the new MiFID II data-reporting regime as well as being essential in supporting regulators’ work on transparency and market surveillance. It is vital that investment firms and trading venues make the necessary efforts to obtain their LEIs in good time.”