Beware roads-to-nowhere pitches for muni market infrastructure
A nascent initiative that has the potential to cause significant market confusion has recently been introduced in the world of municipal bond reference data. Under the seemingly positive banner of “open symbology,” alternative security identifiers are being promoted as a reference data panacea, able to deliver accuracy, flexibility and global scope at a lower cost than traditional identification standards.
A closer examination of what’s really being offered by open symbology initiatives and thorough understanding of the enormous value delivered by existing reference data standards reveals some deep flaws in that pitch.
Unfortunately, that level of close examination is missing from the recent commentary in The Bond Buyer. Driven by a naive view of open symbology and a lack of understanding of the role the existing CUSIP standard plays in the municipal bond market, the article introduces a deeply flawed premise that open symbology will somehow help to fix muni market infrastructure. In fact, it is a road to nowhere.
First, let’s address the inaccuracies regarding the existing CUSIP standard in the commentary.
The CUSIP system was developed by forward-looking market participants to solve the challenge of uniqueness – to create a reliable and highly supported system that provides certainty related to financial instruments and their issuers. In the municipal market, this means uniquely identifying municipal securities and linking them with the issuing entity described in a legal offering document, typically the party responsible for repayment of principal and interest (e.g. a municipal water revenue system).
The CUSIP was not developed, as the Nov. 13 commentary suggests, “for investors to track exactly who owes what.” Identifying the obligor of a bond plays no role in uniqueness, and thus was never a requirement of the CUSIP system. That information is captured and provided by CUSIP Global Services to the industry in a separate field, but by design is not part of the base CUSIP taxonomy.
The ability to answer the critical questions who is who and who owns whom is the express domain of the Legal Entity Identifier (LEI). The LEI standard was developed – with significant input from CUSIP Global Services as part of its drafting committee – in part, to work seamlessly with other standards, such as the CUSIP standard. In fact, CUSIP Global Services has done more to encourage LEI adoption among municipal issuers than perhaps any other market participant. Since 2013, CUSIP Global Services has partnered with DTCC to allow the simultaneous application for CUSIP and LEI in one interface. We have also made our universe of LEI-ISIN linkages publicly available in support of the ANNA/GLEIF mapping initiative connecting securities with their issuing entities.
It is also important to note that CUSIP Global Services is able to make this valuable LEI-to-ISIN mapping freely available to market participants, along with other services, including transactional CUSIP and ISIN web lookups, database licensing for academic and research purposes, and licensing for a variety of other non-bulk use cases. The revenues generated by our commercial offerings allow us to support these free public good initiatives.
The November 13 commentary also suggests that there is a theoretical limit to the number of CUSIPs per issuer that should be created. This is false. The creators of the CUSIP system anticipated that high-volume debt issuers would require multiple “CUSIP6” base codes, and market participants have been making use of a simple “associated issuer” algorithm that links these codes together simply, seamlessly and without industry incident for more than 50 years.
The bigger concern for the industry, however, is not the erroneous depiction of the CUSIP standard, but the misguided assumption that alternative open symbology initiatives are somehow a better solution for the municipal bond market’s needs.
Quite the opposite, the introduction of alternative identifiers into the municipal bond market has the potential to create unnecessary confusion, inconsistency, and reduced efficiency.
Further, in our view, they are duplicative with existing standards and rely on secondary data sources for some underlying issuer and instrument information. Although open symbology is often pitched as a “free” alternative, it introduces a potential dependence on commercial reference data products that cannot be ignored.
The continuous, proactive expansion of the CUSIP system into new asset classes, including digital securities, credit derivatives and syndicated loans is illustrative of CUSIP’s continued growth and relevance in the capital markets. Innovative use of robotic process automation, partnerships with blockchain platform providers, and content delivery in APIs and other customized delivery mechanisms belie the poorly researched claims included in the November 13 commentary.
CUSIP continues to receive enormously high industry survey results on its service, support, innovative spirit and (“fit-for-purpose”) value. The CUSIP system is used as the foundation of asset and issuer setup by all categories of market participants: banks, investment managers, insurers, regulators, infrastructure providers, and data vendors. Other vendor-specific instrument codes rightly serve internal navigation needs and were largely built on the back of – or to map to – the single interoperable common language in the US, Canada and 30 other territories: CUSIP.