Promote LEI in RMB Cross-border Payment Ecosystem

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1. Introduction

When Lehman Brothers collapsed in 2008 and subsequently triggered the world-wide financial crisis, regulators and market participants soon realized the importance of a unified and consistent identifier in prevention of such a systematical financial crisis. Hence, the global LEI system was established and put into operation. The LEI system unifies the existing multiple identifiers, increases data quality and streamlines data validation process, enabling easier risk assessment and management across financial systems.

Under the collaborative efforts of the Financial Stability Board (FSB) and the G20, we have seen a series of effective application and LEI use cases worldwide. FSB, in its 2020 report “Enhancing Cross-border Payments”, called for the use of LEI as a common and global identifier to enhance the quality and accuracy of financial data in cross-border payments. The report also promotes the adoption of a harmonized version of ISO 20022 and common mapping/conversion rules among data formats to reduce transaction costs and improve transparency in cross-border payments.

China has been actively promoting the issuance and use of LEI in legal entity identification. In December 2020, the People’s Bank of China in conjunction with the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange, released the “Roadmap to Implement Legal Entity Identifier in China (2020 - 2022)” to further the use of LEI in Cross-border Interbank Payment System (CIPS) for customer identification, including adding LEI to CIPS financial messages and launching the cross-border legal entity information platform pilot project. As of February 2022, more than 75,000 LEIs have been issued to Chinese domestic entities, the fastest growing country in recent years. It is worth mentioning that CIPS has taken all measures to make sure that all participants qualified for LEI accreditation have been assigned with one. In order to improve LEI issuance service, China has been among the first in the world to explore innovative issuance channels and business models such as bulk issuance, registration agents and verification agents, setting a model for the international community in the transformation and upgrading of the LEI system. At the same time, China is also working on the construction of a cross-border legal entity information platform based on LEI data in hope of enhancing system interoperability and data sharing, promoting an open, healthy and secure digital economy. Zaiyue XU, President of CIPS and board member of Global LEI Foundation (GLEIF) vividly explained in an analogy, “Just like a person who uses his ID card to identify himself in his native country and his passport when traveling abroad, LEI is the corporate passport used by business entities within an international setting.”

2. LEI Use Case in CIPS

Drawing from global LEI use case experiences, CIPS has incorporated LEI into financial messages and actively explored the application of LEI in cross-border scenarios with the combination of LEI and digital certificates.

ISO 20022 is the methodology that guides the exchange rules of financial information, the integrity and feasibility of which have been widely recognized by the international community. Now international consensus has formed that information exchange standards are to transition to ISO 20022 standards. Major payment messages such as pacs.008 have already incorporated LEI as an optional field in customer identification. CIPS is among the few financial market infrastructures that have adopted the ISO 20022 standard since its launch. To maximize the value of LEI in cross-border entity identification, CIPS has also mapped LEI to other applicable identifiers such as BIC, CIPS ID (a unique identifier generated by CIPS) and research on an inclusive identification system that supports LEI, BIC and CIPS ID.

In order to further the use of LEI in cross-border transactions and facilitate cross-border trade and investment, CIPS designed an innovative product “CIPS Connector”, which provides an integrated “one-step” service for a variety of cross-border RMB transactions between banks and enterprises. Every CIPS Connector user is assigned with a LEI, which is used for activating the tool as well as a mandatory business element in their business transaction. By incorporating financial data exchange standards such as LEI and ISO 20022, CIPS Connector specifically addresses the challenges that business entities face when making oversea RMB remittances, including lengthy path, extended cycle, and low efficiency. By the end of 2021, more than 1,500 financial institutions have signed the intent form to use the product. Since its launch, the CIPS Connector has enhanced the straight-through processing rate and achieved full coverage of LEI for domestic CIPS Connector users. According to feedback from users, the installation of CIPS Connector shortens the time, reduces the costs, and improves the efficiency of cross-border payment.

“LEI + digital certificates” is another bold attempt to weave LEI into today’s cross-border RMB payment process. In October 2021, the Register Authority (RA) System in CIPS was upgraded, with LEI information embedded in every newly issued digital certificate. In this way, more business scenarios are developed to apply both digital certificates and LEI for entity identification. As of January 2022, more than 1,100 new digital certificates with LEI information have been issued to CIPS users. Meanwhile, CIPS continuously encourages new users to apply for LEI when joining CIPS.

3. Benefits and Challenges

We have seen a series of achievements in the implementation of LEI in China’s cross-border transactions. LEI enhances Straight-Through-Processing (STP) rates, boosts system operation, and lowers compliance costs. First of all, while processing a transaction, system could automatically capture the LEI data in a given field of a financial message to identify entities involved in the cross-border transaction which greatly boosts speed and reduces cost. Secondly, by incorporating LEI to the KYC process and subsequent messaging modules, and by mapping LEI to proprietary identifiers, automatic reconciliation and verification can be achieved, thus simplifying and streamlining monitoring and on-boarding processes. Thirdly, the adoption of LEI in cross-border payments empowers compliance monitoring and reduces the risks of payment delays.

Achievements aside, challenges remain. First of all, the depth of LEI application needs to be improved, and more business scenarios like CIPS Connectors are needed to enhance service range and product diversity. Secondly, more promotion activities are necessary to raise the awareness of LEI among industry players. There are not enough market participants expressing the strong willingness in applying LEI to cross-border transactions. And some of them have little knowledge about what LEI is and how LEI functions. Thirdly, LEI volume and coverage rate is far from satisfactory. For instance, LEI in China has yet to cover the many firms (other than financial institutions) participating in cross-border RMB transactions. What’s more, the accuracy of LEI data is of crucial importance when it comes to cross-border transactions -- it is crucial that the information on the legal form of an entity and the country/region in which the legal entity is registered must be up-to-date. Therefore, LEI reference data need to be updated in a more timely manner to assure its effectiveness and quality.

4.Future Outlook

In the future, CIPS will step up its partnership with LEI Regulatory Oversight Committee (ROC) and GLEIF, and continue its work in promoting LEI data quality, increasing LEI coverage, standardizing information transaction and conversion, improving fragmentation in data sources, furthering the use of LEI in entity identification during the ISO 20022 migration process, and enhancing the use of LEI in China’s financial product services and data governance to bring about a faster and more transparent cross-border payment.

In the process of building the new development paradigm featuring dual circulation, in which domestic and overseas markets reinforce each other, we should view the promotion of international standards such as LEI as a fundamental work to increase our level of participation in international standard governance and facilitate the interoperability and connectivity of financial information. What’s more, we shall call on mutual recognition of electronic seals between China and other regions and explore further use cases of GLEIF verifiable LEI (vLEI), so as to contribute Chinese experience and wisdom to the construction of a safer and more efficient cross-border payment ecosystem.