Developing New Standards to Meet Market Needs I 3 Introduction

MAY 2012 Prepared by Matthew Bastian Director, Market and Business Development CUSIP Global Services Table Of Contents FOREWORD: THE POWER OF CONSISTENCY .................... 3 I.••••••INTRODUCTION ......................................... 4 II.•••••THE NEED FOR A COMMON LANGUAGE ........................ 4 III.••••BANDING TOGETHER: MAKING THE GOOD BETTER ................ 6 IV.•••••GOING INTERNATIONAL .......................................... 8 V.•••••THE NEXT FRONTIER: LEGAL ENTITY IDENTIFIERS (LEI) .................. 9 VI.••••THE FALSE PROMISE OF “OPEN SYMBOLOgy” .............................11 VII.•••SECURITY IDENTIFIERS AND DATA FLOWS IN THE FINANCIAL SERVICES INDUSTRY ......12 VIII.•• • ROADMAP FOR THE FUTURE .................................................. 13 IX.••••CONCLUSION ................................................................ 15 The Power of Consistency Consistency is a unique virtue that can only truly be enjoyed by never having to think about it. Heartbeats, breathing, the changing of the seasons; we only really notice when something happens to disrupt the normal operation of these functions. And when that happens, the results are often dire. We see this phenomenon at work daily in the financial markets. On any given day, total equity trading volumes on the New York Stock Exchange range between three and four billion shares. That’s a single asset class on a single exchange in a single day. All of these are bought, sold, cleared and settled in milliseconds without anyone ever thinking about the mechanism that allows that to happen with consistency day-in and day-out. Standards are what make this function possible. Standard protocols for trading, clearing and – most importantly – identifying financial instruments allow vast amounts of information to be conveyed across different institutions and different time zones in fractions of a second. As owners of the CUSIP numbering system, managed on our behalf by S&P Capital IQ, we have been in the business of creating the only universally recognized, vendor-neutral securities identifiers that allow market participants to track investments across institutions, exchanges and nations since 1968. In that time, we’ve learned a thing or two about the importance of financial standards, what separates a good one from a bad one and the right approach to creating new standards to address changing market needs. The following whitepaper, written by Matthew Bastian, Director of Business Development, CUSIP Global Services (CGS), shares some of that wisdom, collected over the past 44 years as our CUSIP standard, and its many specialized offspring, have become the silent source of consistent reliability for over 10 million financial instruments. C. Diane Poole SVP, Data Management & Policy Development American Bankers Association DEVELOPING NEW STANDARDS TO MEET MARKET NEEDS I 3 Introduction It is difficult to think of any industry or human endeavor that doesn’t benefit from the development and application of standards. From light bulb bases to shipping containers to the gauge of a transcontinental railroad track, history has shown that standards quietly bring a baseline level of efficiency - and an accepted way of doing things - to nearly every form of commerce. Indeed, where standards don’t exist, chaos often reigns. The financial industry is no different. From the front office to the back, standards contribute reliability and consistency to what history has shown can be a messy Standards process: the clearance and settlement of trillions of dollars in trades. Enhance Efficiency History has shown This paper will offer deeper insight into the standards process and where its that standards quietly introduction and development has directly addressed problems or information gaps bring a baseline level of in the capital markets. We will also posit, through proven, time-tested examples, efficiency to nearly every the best practices for ensuring the success of any robust standards development in form of commerce. the future. The Need for a Common Language In the famous Biblical tale about the Tower of Babel, it was the “confounding” of the peoples’ language that caused them to scatter and, ultimately, their ambitious project to fail. Much like a common spoken language, a standard may best be described as an accepted means of communication. In the financial markets, we see this with everything from corporate action messaging to transmission protocols to identifiers. In the U.S. markets, perhaps the best known example of the last category is CUSIP®, which was borne out of the “paper crunch” of the 1960’s. As trading volumes increased during the early part of the decade, the clearance and settlement process forced the markets to shut down so that the post-trade paperwork could be reconciled. To address the problem, the New York Clearing House Association approached the American Bankers Association (ABA), whose efforts resulted in the establishment of the CUSIP system in 1964. The ABA’s new creation quickly paid dividends by creating a standardized process for uniquely identifying instruments and their issuers, replacing the old Tower of Babel with a common language for market participants. DEVELOPING NEW STANDARDS TO MEET MARKET NEEDS I 4 A modern example of a CUSIP, in this case for a common stock, would be as follows, demonstrating the unique issuer (first six characters) and issue (seventh and eight positions) construction of the code: STRUCTURE OF A CUSIP CUSIP Gobal Services (CGS) provides a 9-character standard CUSIP identifier for issuers and their financial instruments offered in the U.S. and Canada. Example: Amazon.com Inc. – Common Stock CUSIP ISSUER ISSUE CHECK IDENTIFIER 023135 10 6 023135106 First 6 Characters Next 2 Characters Next 1 Character Resulting 9 Characters • Identifies the unique • Identifies the type of • A mathematical formula • A unique identifier name of the: instrument: checks accuracy of the – Company – Equity previous 8 characters – Municipality – Debt • Delivers a 1 character – Government Agency • Uniquely identifies the check result • A hierarchical alpha issue within the issuer numeric convention • A hierarchical alpha linked to alphabetic numeric convention issuer name A cornerstone of the CUSIP system, the unique issuer/issue format of a CGS identifier is a feature that many firms have come to rely upon for risk management and counterparty exposure: 023135, to continue the above example, would never be used to identify anything other than an issue for Amazon.com Inc. Since its inception, CUSIP has grown to cover over 14 million unique securities, with both the identifiers themselves and the related descriptive data allowing trillions of dollars in capital markets activity to flow smoothly every day. Standards, and bodies like CGS which support them, continue to bring a level of reliability and efficiency that financial firms have come to depend upon. DEVELOPING NEW STANDARDS TO MEET MARKET NEEDS I 5 Banding Together: Making the Good Better Standards are made even more powerful when individual or regional bodies get together to refine and improve the standard in question. Proof of that dynamic is embodied by the Swiss-based International Organization for Standardization (ISO), an organization dedicated exclusively to that task. ISO has laid the foundation for a number of standards used widely throughout the financial industry. One of the more notable applications is the 12-character ISIN for cross-border trading, more formally known as ISO 6166. To serve as the managing body, or Registration Authority (RA), for the ISIN standard, ISO selected the Association of National Numbering Agencies (ANNA), of which CGS was a founding member in 1992. ANNA has grown over the years to now consist of 118 independent members and partner organizations representing 200 jurisdictions. The combined utility of member-contributed ISINs and related descriptive data, known as the ANNA Service Bureau (ASB), today contains over 16 million unique instruments. But even as the ISIN standard gained traction and brought new efficiency to the global markets, ANNA members understood that their work is never done; standards must evolve to meet the needs of a changing marketplace. In short, what worked before can be refined or improved to meet new challenges. One of these improvements was the Classification of Financial Instruments, or CFI Code (ISO 10962), which established a uniform structure for categorizing financial instruments. The CFI structure breaks down into a Category, Group and four Attribute fields, for a total of six characters: ISO CFI Code ESVUFR Asset / Product Type Category E = Equity Group S = Shares Attributes 1st Attribute – Voting right V = Voting 2nd Attribute – Ownership U = Unrestricted 3rd Attribute – Payment Status F = Fully Paid 4th Attribute – Form R = Registered DEVELOPING NEW STANDARDS TO MEET MARKET NEEDS I 6 The CFI code quickly gained traction as a cross-border communication vehicle. Instead of uniquely identifying an instrument like the ISIN does, the CFI identifies the unique attributes of a financial instrument, such as voting rights, ownership, payment status and form. These attributes are identified consistently across all securities regardless of regional customs, languages or proprietary means of valuation and identification, embedding critical instrument-level data directly into the global trade process. But, while the CFI code has proven useful for most types of securities traded globally, and is even a required data element in the

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