The CUSIP – A Tax on Financial Market Innovation and Transformation

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The following is a guest article written by Tim Baker, CFA principal of Blue Sky Thinking, LLC which provides management consulting, project management and strategic business consulting in the big data, financial services, and FinTech industries.

Over the years I have written about and tried to help solve issues and challenges in the enterprise data space, specifically around the topic of symbology and security identifiers.  There are two root causes at play:

  1. the way that human readable tickers are recycled and reused;
  2. the licensing regime for machine readable identifiers which has limited their adoption to those that can afford the license.

These long-standing issues are a significant tax on the financial ecosystem and have led to a patchwork of cross-referencing tables and hacks that has created systemic risk for institutions and the markets in which they operate.  But it doesn’t need to be this way – read on and consider the “Call to Action” at the end of this piece.

The merger of IHS and S&P Global will create another powerhouse in financial services data.  Perhaps one of the most interesting aspects of the deal is that the European Commission  has required that S&P divest CUSIP Global Service (CUSIP) – which since 1968 has managed the assignment the CUSIP security identifiers on behalf of the American Bankers Association (ABA).  Where and how it is divested should be of major interest to market participants and regulators.

Background

According to Wikipedia:  “The acronym CUSIP typically refers to both the Committee on Uniform Security Identification Procedures and the 9-character alphanumeric security identifiers that they distribute for all North American securities for the purposes of facilitating clearing and settlement of trades. The CUSIP distribution system is owned by the American Bankers Association and is operated by Standard & Poor’s. The CUSIP Service Bureau acts as the National Numbering Association (NNA) for North America, and the CUSIP serves as the National Securities Identification Number for products issued from both the United States and Canada”. 

For more than 50 years CUSIPs have enabled the smooth settlement and trading of a wide range of securities – its original purpose. 

But over time, as markets have become more sophisticated, and downstream use cases have proliferated, CGS has been able to reap significant additional feed revenues enabled by its tight control of the CUSIP and associated public reference data.

Potential Buyers Likely to Run the Business “As-Is”

Speculation is that the business could be sold to one of the other major players in the industry – an exchange or another vendor.  The DTCC has been rumored to be in the fray.   The DTCC might be a good choice, since it too was formed to provide critical modern infrastructure for markets, and it is also owned by the key stakeholders in that mission – the banks, brokers and asset managers.  They are also big users and redistributors of CUSIPs, and for years have been frustrated by deficiencies in security identifiers.  Whatever commercial venture buys CGS it is likely to be buying it for this ridiculously favorable business model and will be unlikely to change a thing! 

And change is unlikely to occur prior to the sale.  A recent statement from CUSIP and ABA would suggest there are no plans to change the model, nor to stop defending their dominant market position.  A  recent submission to the SEC jointly from CUSIP and ABA attempted to block the inclusion of Bloomberg’s OpenFigi in SEC filings suggesting it would lead to “inefficiency and errors”.    

Prior Regulatory Action Has Been Limited – Which Needs to Change

Despite the importance of the CUSIP identifier, and some of CGS’s questionable licensing practices,  to date CGS has attracted relatively little attention from regulators. Back in 2011 an antitrust review by the EC charged S&P CapIQ with abusing its position as the sole provider of US ISINs (CUSIPs).  Under the settlement S&P agreed to provide a low cost “low value” (unusable?) feed as part of the settlement.  Unfortunately that investigation focused on pricing, frustrating various industry bodies that other tactics and strategies aimed at protecting the broader revenue stream were not considered.  A customer quote from a recent Walters Technology article about the divesture says it all: “What a deal. You charge somebody to issue a CUSIP and then when they use it, you say they have to pay a licensing fee. … Those who license CUSIP and pay for CUSIP hate them. It’s a red-hot hate”. 

So – will this sale transaction get the regulatory attention it deserves?  Regulators might look the other way – working on the assumption that the ABA has the best interests of the market in mind – an assumption worth challenging.     Regulators could look at the relatively small size of the business ($100-200m?) and consider it a small business  – unaware of the downstream implications and costs to the industry of allowing the status quo to prevail. 

Call To Action

If regulators do wave through a sale to another commercially orientated entity, I’d like to see them simultaneously promote competition – allowing alternative providers to set up, achieve equivalent prominence on new issues, as well as to back build history files.  The latter will require access to data which should be provided by CGS to these new players, at a reasonable or nominal cost.    Let’s not forget that when Thomson and Reuters came together, the new entity was required to sell copies of the flagship fundamental, estimates and research products.  Ironically this helped the likes of Factset and S&P(!) to establish competing products.

So here is my call to action:

Firstly – please give me feedback and share your thoughts on this article in the comments section.  I may have some facts wrong or be missing some key points.

Secondly – Should you agree with my stance, please share the article with your network – talk to colleagues and run this up the flagpole at your firm.  Work with your favorite industry body – like the FISD, the EDM Counsel, or IPUG.  Contact your regulator – the SEC under Gary Gensler seems more open to taking on market structure issues – this one should be of keen interest.   Anyone have his email address?

The world has changed since the inception of the CUSIP and we need to press the RESET button.  We need a new approach to this whole area – one which removes the tax on innovation and helps to drive transformation across the financial services industry.  

And to any potential buyers of CGS – do your diligence.

Tim Baker, CFA

tim@blueskythinking.io

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About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email: Michael.Mayhew@integrity-research.com

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