Bond trades may suffer in last-minute rush to meet ID code rules
New regulations requiring bonds and derivatives trades to have a legal entity identifier number (LEI) for the first time may result in failed transactions, experts have warned. The new rule contained within Mifid II regulations that come into force in January may cause a last-minute rush by firms to get their securities a unique 20-character LEI. Until now, the vast majority of bonds have not needed to comply with the standard. "It is a massive implementation problem,” said David Bullen, founder of Bullen Management. Asia does not conform to the LEI standard so investors there may have difficulties trading in Europe.
Fixed income traders may face a last minute rush to attain vital trade identifiers in order to meet MiFID II’s transaction reporting rules.

Stricter reporting rules will require bonds and derivatives trades to have a legal entity identifier (LEI), a concept that is completely new to the fixed income industry.

The regulation states buy-side firms subject to the transaction reporting rules should not execute a trade on behalf of their clients who do not have a LEI in place.

This could mean a lot of failed fixed income trades if they do not have a LEI, according to panellists at The TRADE’s and ICE Data Services “Overcoming MiFID II Data Challenges” event.

One panellist highlighted that around 90% of sovereign issue bonds and between 50-75% of all corporate bonds do not have an LEI.

“These are not insignificant numbers, and it is about the creation of them [LEIs]. It is a massive implementation problem, and some people have to go out and create them, and clearly apply them to the fixed income world,” said David Bullen, founder, Bullen Management.

“There has never been a requirement to have the LEI at the time of the trade, but after January 2018, you need to know it exists before executing a trade. Otherwise you will be unable to report that transaction and you may well be penalised.”

The LEI mandate is a global one, applying to all market participants carrying out business with European counterparties. However, the LEI regime is absent in Asia, where only 3% of global LEIs have been issued.

This could mean a large portion of Asian investors will not be able to trade in Europe, another panellist explained.

“A key challenge for those firms that have not used LEIs beyond derivatives, is that there are many entities that must have an LEI for MiFID II such as the executing entity, the buyer and seller decision makers, order receiver, entity which submitted the order, the counterparty, the fund manager etc.” said Chris Johnson, senior product manager, market data, HSBC Securities Services.

However, the impending rules have forced buy-side firms to look more closely at their data and the information they have to provide to the regulator.

“What is clear is that there is a lot of scrutiny coming back on the transaction eligibility indicator that we provide because everybody is trying to ascertain what in their portfolio’s is transaction reportable,” said Hubert Deroubaix, business development director, ICE Data Services.

“There are fairly complex criteria surrounding that as it is not just what is directly listed in Europe, there are ramifications through the underlines.”

The ‘no LEI no trade’ concept is an unavoidable one that investment firms will just have to accept and prepare for sooner rather than later. The panel agreed that there is no excuse for market participants not to prepare, however the industry can collectively work together to bring about solutions and ease implementation for everyone.