The recent proposal by the Federal Deposit Insurance Corporation (FDIC) to replace CUSIP numbers with Financial Instrument Global Identifiers (FIGI) has sent shockwaves through the municipal bond market. This unexpected development has raised concerns among market participants about the potential implications of such a switch. According to Matthew Bastian, senior director at CUSIP Global Services, the process leading to this proposal was not transparent, and there were closed-door discussions to expand the scope of FIGI implementation without proper consultation.
The FDIC is working in collaboration with seven federal agencies, including the Securities and Exchange Commission (SEC), Treasury, the Governmental Accounting Standards Board, and the Municipal Securities Rulemaking Board, to determine how the new rules under the Financial Data Transparency Act will be enforced. While the intention behind these efforts is to enhance transparency in financial markets by making disclosures machine-readable, the proposed shift from CUSIP to FIGI raises valid concerns about its feasibility and potential impact on market operations.
CUSIP Global Services has raised concerns about what they perceive as a fundamental flaw in the proposed change of identifiers. They argue that this shift undermines the original intent of the law and could create significant operational challenges for financial market participants. Moreover, the lack of fungibility in FIGI poses a major drawback, as it means that the same financial instrument may not have the same identifier across different trading venues.
The proposed transition from CUSIP to FIGI could have far-reaching implications for the municipal bond market. Matthew Bastian warns that such a change would be “painful and chaotic,” given that the market has relied on the CUSIP system since the Municipal Securities Rulemaking Board adopted it in 1983. The granular features of the CUSIP system, including the use of different base issuer numbers and treatment of partial pre-refundings, are integral to how the municipal bond market functions.
FIGI, developed under the auspices of the Object Management Group (OMG), represents a new approach to identifying financial instruments based on open data principles and rigorous technical methodologies. OMG has expressed satisfaction with the FDIC’s proposal to adopt FIGI as the common identifier for financial instruments, emphasizing its innovative data management capabilities. However, CUSIP has highlighted several drawbacks to the industry’s shift to FIGI, including concerns about fungibility and operational efficiency.
Regulatory Oversight by the SEC
The Securities and Exchange Commission is taking the lead in implementing the Financial Data Transparency Act, which was signed into law in 2022. As the primary regulatory body overseeing financial markets, the SEC’s role in enforcing the transition from CUSIP to FIGI will be crucial in determining how market participants adapt to these changes. The industry awaits further guidance from regulatory authorities on the implications of this proposed shift and how it will impact market dynamics.
The proposed changes in the municipal bond market from CUSIP to FIGI have sparked a contentious debate among market participants. While the aim of enhancing data transparency is commendable, the practical implications of this transition remain a cause for concern. Market stakeholders will need to closely monitor developments in regulatory oversight and industry standards to navigate the potential challenges posed by this significant shift in market infrastructure.