2.1.6 [W3C-XSS] Section 3.14.4, Simple Type Definition Validation Rules
Validation Rule: String Valid For a string to be locally ·valid· with respect to a simple type definition all of the following must be true: 1 It is schema-valid with respect to that definition as defined by Datatype Valid in [XML Schemas: Datatypes]. 2 The appropriate case among the following must be true: 2.1 If The definition is ENTITY or is validly derived from ENTITY given the empty set, as defined in Type Derivation OK (Simple) (§3.14.6), then the string must be a ·declared entity name·. 2.2 If The definition is ENTITIES or is validly derived from ENTITIES given the empty set, as defined in Type Derivation OK (Simple) (§3.14.6), then every whitespace-delimited substring of the string must be a ·declared entity name·. 2.3 otherwise no further condition applies.
Schema validation does not use the ENTITY attribute, so all statements that refer to ENTITY or the ENTITIES attribute are ignored.