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. The move, based on standards developed by Bloomberg, has raised concerns and sparked debates among industry experts.
Matthew Bastian, senior director at CUSIP Global Services, expressed his reservations about the proposed change. He highlighted that the process leading to this decision was somewhat opaque, with efforts being made behind closed doors to expand the scope of the Financial Data Transparency Act (FDTA) to include security-level identifiers. This lack of transparency has raised red flags regarding the potential implications of this switch.
The FDIC is collaborating with seven federal agencies, including the Securities and Exchange Commission, Treasury, the Governmental Accounting Standards Board, and the Municipal Securities Rulemaking Board, to determine how the new rules mandated by the FDTA will be implemented. This collaborative effort signifies the significance and complexity of the proposed change in the financial market.
One of the major concerns raised by experts is the potential impact this switch could have on the municipal bond market. The reliance on CUSIP numbers has been deeply ingrained in the market since the Municipal Securities Rulemaking Board embraced it in 1983. The granular features and nuances of the CUSIP system have become integral to how the municipal bond market functions, and any drastic change could lead to chaos and confusion.
The FDTA aims to bring more transparency to financial markets by making disclosures machine-readable, thereby moving away from traditional reliance on PDFs. The development of FIGI under the auspices of the Object Management Group represents a step towards a modernized data management approach for identifying financial instruments. However, concerns persist regarding the practicality and operational challenges associated with this transition.
CUSIP has outlined several major downsides to the industry transitioning to FIGI, including concerns about fungibility. Fungibility, the idea that a specific financial instrument should be represented by the same identifier regardless of where it is traded, presents a significant challenge under the proposed switch. This lack of fungibility could have far-reaching implications for market participants and trading venues.
The Securities and Exchange Commission is spearheading the implementation of the FDTA, which was signed into law in 2022. The regulatory oversight provided by the SEC underscores the importance of ensuring a smooth and effective transition to the new identifier system. Industry stakeholders, regulators, and market participants will need to work collaboratively to navigate the challenges posed by this significant shift.
The proposed switch from CUSIP numbers to FIGI in the municipal bond market represents a fundamental change with wide-ranging implications. The industry must carefully consider the potential risks, operational challenges, and regulatory requirements associated with this transition to ensure a smooth and efficient implementation process. Only through active collaboration and thoughtful planning can market participants adapt to the new reality of financial instrument identification.