SMSFs that invest in non-exchange-traded investment instruments, such as contracts for difference (CFD), are failing to renew a globally used legal entity identifier (LEI) and could lose access to some markets, according to one issuer of the number.
APIR Systems chief executive Chris Donohoe said the number of LEIs issued had continued to climb after SMSFs and other groups, such as brokers and self-directed traders, were required to have one after 30 September 2019, but at the same time annual renewal rates had also started to decrease.
“This is a global concern where lapse rates are around 30 per cent on average and at 15 per cent, specifically, in Australia,” Donohoe said.
LEIs are connected to a product issuer and identify both parties in a financial transaction and were first put in use after the global financial crisis to prevent fraud.
Donohoe said while they are heavily used in some markets, such as Europe, their regulation and use in other markets is inconsistent, but to prevent access to some markets being removed, LEI holders should retain them.
“To be really useful as intended the rate of renewals must be higher, otherwise parties in a transaction may be operating with out-of-date information and it’s up to regulators in each jurisdiction to manage this,” he said.
He said APIR was speaking with the Austrtalian Securities and Investments Commission (ASIC) about the rate of uptake and renewals in Australia, adding among institutional and large retail investment groups the lapse rate was low, but climbed among smaller retail investors, including SMSFs.
“The institutional world understands the need to get and keep an LEI, but that is not so much the case in the retail sector, which is not aware of this requirement until they want to trade CFDs or foreign exchange,” it said.
He noted there was no penalty for not holding a current LEI and therefore no pressure on an SMSF, or their broker, to cease trades if they hold a lapsed LEI.
“The issue is dependent on where someone might want to trade as some markets will require it, but there will be limits on what other opportunities might be available and a fund could be caught out if they want to take advantage of a new market or product offering,” he said.
He said ASIC was considering how to bring the LEI obligations in line with other jurisdictions and ensure those who required an identifier held one before trading.
“This is a good opportunity to create regulations as good as any other jurisdiction as we head into further growth in the use of the LEI,” he said.
