How Legal Entity Identifier (LEI) is necessary for financial transactions?

The Legal Entity Identifier (LEI) is necessary for financial transactions because it uniquely identifies legal entities that are involved in these transactions. When a financial institution enters into a transaction with another legal entity, such as a company or a financial market participant, it needs to be able to accurately identify that entity to ensure that it is complying with regulatory requirements, managing risks effectively, and avoiding fraud.

The LEI is a 20-character code that provides a unique identification for each legal entity. It contains information about the legal entity's ownership structure, as well as its connections to other legal entities. This helps to improve transparency and mitigate risks in financial markets, as it enables regulators, financial institutions, and investors to more easily identify and monitor entities involved in financial transactions.

In addition, many regulatory authorities require the use of LEIs as part of their reporting and risk management requirements. For example, under the European Market Infrastructure Regulation (EMIR), firms are required to report details of their derivative trades to trade repositories, and an LEI is required for both the counterparties involved in the trade. The same is true for other regulatory reporting requirements such as MiFID II, Dodd-Frank Act, etc.

Therefore, the LEI plays an important role in ensuring that financial transactions are conducted in a transparent and safe manner, and that regulatory requirements are met.