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 FinancialI nstruments, 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 Russian markets, it did not account for securities, such as municipal bonds, that are unique to U.S. market participants. In response to this gap, and after discussion within the U.S. standards body known as X9D, CGS created the U.S. CFI code with Category and Group attributes that are specific to asset classes within its jurisdiction:

U.S. CFI Code MGFUFR Asset / Product Type Category M = Municipal Group G = GO Bond Attributes 1st Attribute – Type of Interest F = Fixed Rate 2nd Attribute – Guarantee U = Unsecured 3rd Attribute – Redemption F = Fixed Maturity 4th Attribute – Form R = Registered

Building on the collaborative spirit behind the CFI code, ANNA recently came together for the creation of the Financial Instrument Short Name Standard (FISN), known as ISO 18773 and 18774, which promotes the use of standardized abbreviations in descriptive terms for both financial instruments and their issuers.

The FISN abbreviations create a standardized way of combining the name of an issuer of securities and the underlying financial instrument to further aid risk management and security master file maintenance. For example, when using a FISN a market participant can identify a subordinated convertible venture of IBM that matures September 15, 2020 in a single 35 character code. The obvious benefit of this structure is its accuracy. While different firms and even different departments within the same firm may develop their own shorthand for a particular security, the FISN creates a technical standard that allows all systems to speak the same language.

Developing New Standards to Meet Market Needs I 7 Going International

In 1989, under the direction of its industry-appointed Board of Trustees, what was then known as the CUSIP Service Bureau (CSB) went global with its expansion into 9-character CUSIP International Numbering System, or CINS, codes for non-North American securities actively traded internationally.

ISIN, the international standard laid out previously, does serve its purpose quite well for many market participants. However, some international firms communicating with or servicing U.S. clients, whose systems may already accommodate the 9-character CUSIP system, felt that another solution was in order. That demand led to the creation of the CINS:

Structure of a CINS

CGS provides a 9-character standard CINS identifier for non-U.S./Canadian financial instruments.

Example: Abingdon Capital PLC – Shares

COUNTRY CINS CODE ISSUER ISSUE CHECK IDENTIFIER

G 0052B 10 5 G0052B105

First Character Next 5 Characters Next 2 Characters Next 1 Character Resulting 9 Characters • Identifies country or • Combined with • Identifies the type of • A mathematical formula • A unique identifier region where issuer is Country Code, uniquely instrument checks accuracy of the incorporated identifies the issuer previous 8 characters • Uniquely identifies the • CGS’s rules-based • In this case, Abingdon issue within the issuer • Delivers a 1 character engine governs check result designation • In this case, G = United Kingdom

Increasingly popular with both end user firms and data vendors seeking an international identifier solution that fits a different format, CINS, a natural extension of the CUSIP system, has proven to be a good fit in any securities processing workflow that involves U.S. clients.

The success of the CINS was driven largely by the globalization of financial markets. As more and more global firms began buying and selling non-U.S. securities, it became critical to retrofit non-U.S. characters into their systems. The CINS automated this process by assigning a country code to the base CUSIP construct, giving global firms an easy way to quickly identify their non-U.S. holdings.

Developing New Standards to Meet Market Needs I 8 The Next Frontier: Legal Entity Identifiers (LEI)

For years the financial industry has grappled with the need for a standardized, unique identifier at the entity level, similar to what ISIN did for instruments. While market participants had been near unanimous in acknowledging the demand for such a code, views on how to create a solution were equally fractured. As a result, previous attempts, such as the International Business Entity Identifier (IBEI), never gained the necessary traction. Stumbling blocks ranged from an inability to coalesce around a single standard to disagreement over the operational model to the lack of a willing entity to assume the Registration Authority responsibilities.

Fast forward to 2008: the raging financial crisis once again highlighted the need for a standardized view of issuers, counterparties and obligors. Exposures to troubled or failed firms sent ripple effects throughout the industry, bringing terms like “single name exposure” and “too big to fail” to the forefront of the dialogue. Determined to never again be hobbled by the inability to get a complete picture of systemic risk, global regulators breathed a renewed sense of purpose into the industry’s push for a global LEI.

In addition to being an involved participant at every step of the global dialogue around a standardized LEI, CGS was at the vanguard of the effort to tackle the CABRE problem with its CUSIP Avox Business Reference Entity (CABRE), a joint venture A ten-character code with Avox (a DTCC company). Leveraging the issuer CUSIP 6 number, in cases that uniquely identfies each entity involved in a where the legal entity is an issuer, CABRE is a ten-character code that identifies a financial transaction. unique entity involved in financial transactions. The resulting CABRE directory also includes the core descriptive data for each legal entity:

CABRE Avox ID Legal Name Address City U.S. State Country CUSIP Issuer # US00231359 3201952 Amazon.com Inc. 1200 12th Avenue South Seattle WA US 02315

RO0X0259Z0 11085768 ASTRA SA Str. Fratii Buzesti 8 Craiova RO X0259Z RO0X025A01 11086385 ASTRA SA Str. SF. Vineri Pitesti RO X025A0

SG10050763 2368764 ACE Insurance Limited 600 North Bridge Road Singapore SG HK10051107 2368613 ACE Insurance Limited 6-8 Harbour Road Wanchai HK

Developing New Standards to Meet Market Needs I 9 CGS stands committed to contribute its CABRE content and standards expertise to the creation of any global LEI standard (as of this writing, the standard is proposed as ISO 17442). That federated/centralized approach, with CGS and its ANNA brethren working as agents of the LEI Utility, could work as follows (CGS as the sample NNA):

Leveraging the NNA’s: Current Workflow

Issuers and Obligors PRE-TRADE SELF-REGISTRATION CUSIP Lead Underwriter Global Services

Counsel Electronic Documents

PRIORITIZE & PROCESS

ELECTRONIC CONFIRMATION • XPRESS Requests (1 hour or less) (includes LEI) • Standardized Issuer & Issue Descriptions • Up to 60 Data Elements • Final CUSIP/CINS/ISIN Assignment • Issuers and Obligors also get an LEI

Real-Time CGS & ASB LEI UTILITY DATA DISTRIBUTION Web Data Services

Developing New Standards to Meet Market Needs I 10 The False Promise of “Open Symbology”

One flawed premise floated in recent years is that the standards process in the financial markets can be reduced to, or is somehow synonymous with, the mere identification of financial instruments; that any firm can randomly generate thousands of codes, link them to instruments and, in the process, solve the industry’s reference data challenges. As we’ve seen over the past 40 years of identifier development, this premise is an over-simplification that defies the logic of the real-world financial markets.

The main advantage to consider with standards, as laid out in previous examples, is the inherent interoperability – the notion that the standard can be quietly relied upon regardless of vendor environment. Interoperable, standardized identifiers, for example, allow users the freedom to migrate from one supplier to another, or communicate with external firms, with the confident knowledge that the other party will be speaking the same language. Proprietary symbols, free or otherwise, simply cannot boast of the same level of interoperable efficiency.

Indeed, one can draw a parallel between the “open symbology” concept and the “free razor handle” marketing ploy used by some consumer products groups. Recipients of the handle focus on the fact that they got something for free, when the real gambit is to lure them into buying the much more expensive razor cartridges. In a similar fashion, identifiers stemming from a proprietary environment can lock firms, perhaps unwittingly, into a silo of the data, analytics or services of the same provider as the symbols themselves. It’s only when the price of the razor cartridges – or, in this case, the data and analytics – go up that the consumer realizes he may have been mislead.

Only true, interoperable standards like CUSIP can help firms avoid that trap.

Developing New Standards to Meet Market Needs I 11 Security Identifiers and Data Flows in the Financial Services Industry

Vendor-specific identifiers enable easy communication back and forth with the VENDOR respective vendor. But without a CUSIP, data sets from different providers can’t be easily tied together as they use CUSIP CUSIP identifiers are completely unrelated identifiers. common to each data feed

INCOMING DATA SOURCES

PRICING EASY DATA CROSS-REFERENCING TERMS & CONDITIONS PRICING DATA TERMS & CONDITIONS DATA CORPORATE ACTIONS CORPORATE ACTIONS and more... OPERATIONAL WORKFLOW Vendor-specific identifiers can lock you in to one provider making you captive to possible service- and price-level changes.

Send trade messages to Broker-Dealers

Receive trade confirms

Receive information from Clearing & Settlement firms

Interact with Custodian

CUSIPs also allow smooth outgoing communications with financial institutions

Developing New Standards to Meet Market Needs I 12 Roadmap for the Future

Having outlined the history of standards and their development to meet market needs, we’ll lay out some common characteristics of those developments – the best practices we employ at CGS and which we believe must be applied to any future industry needs. The key elements are: Data Quality, Interoperability, Sustained Investment, Industry Input and Collaboration.

Data Quality

Data quality is always a concern for an industry in which, by some estimates, $52 to $94 billion of fixed income trades do not get delivered on time each day. These failed trades were identified as a problem as early as 2005 in a study by the Federal Reserve Bank of New York, which found that miscommunication between buyer and seller was one of the many reasons for settlement problems.

Proper communication, of course, starts with reliable data and identifiers, allowing both counterparties to be confident that they are talking about the same security with the correct terms & conditions.

CGS reinvests heavily in its data collection and distribution technology, helping to ensure excellent data quality from the point of initial issuance. This is a labor- Data Quality is Always a Concern intensive process that requires a thorough review of the initial offering document, a cross-check by a separate Quality Assurance team and, frequently, confirmation Continual reinvestment has put CGS at the of the final details with the requester. That focus on reinvestment has put CGS at forefront of numbering the forefront of numbering agencies when it comes to data quality. One NNA, for agencies when it comes example, can only claim CFI codes for 6% of the ISIN’s in its jurisdiction; another to data quality. NNA had generated 198,000 ISIN’s with invalid currency codes.

Citing examples like those listed above, CGS continues to work with its ANNA colleagues to improve the quality of the data contributed to the ASB. It is important to note, though, that when it comes to “free” you sometimes get what you pay for.

Interoperability

As discussed in an earlier section, “open” is not synonymous with “interoperable” when it comes to standards or identifiers. Indeed, the Siren’s call of “open standards” can be a cynical ploy to sell or entrench much higher priced data and analytics.

With more than 40 years in the business of standards and descriptive data, CGS is proud to say that it’s never had the option of saying “no” to any market participant. Our databases are made available, under transparent and nondiscriminatory terms, to any firm that needs to leverage the efficiency of CGS content.

Developing New Standards to Meet Market Needs I 13 When it comes to standards, having the ability to move seamlessly from one vendor platform to another, or even consume data from multiple vendors simultaneously, is critical.

Sustained investment

Sustained growth and reinvestment are the hallmarks of any effective standards body. Those that rest on their laurels, or perhaps are not incentivized to reinvest in development, will ultimately let down the customer base they are meant to serve. As noted in the discussion of data quality, a lack of focus or reinvestment can manifest itself in some unfortunate ways – “free” comes with a hidden cost.

Whether it’s updates to our distribution technology like CUSIP FIRST, a web tool for high-volume issuers, or more precision within data products, such as adding flags for government stimulus programs, CGS has shown the necessary responsiveness and willingness to reinvest in development.

Industry input

Standards bodies that operate in a vacuum will, more often than not, be unsuccessful. For proof, one needs to look no further than the ongoing global dialogue around a standardized LEI, where industry participants and regulators have come together to craft a solution to a very real problem. That collaborative effort, where all interests and concerns could be represented, helped move forward an initiative that had failed previously on its own.

In a similar vein, CGS has always taken direction from its industry-appointed Board of Trustees. No new asset class, geographic expansion or other initiative takes place without the Board’s guidance.

That ongoing dialogue and input ensures that CGS is focused on the most pressing needs of the industry.

Collaboration

Whether it’s ISO and ANNA teaming up for the ISIN standard, or the industry and regulators coming together in support of the LEI, there are times when additional views or subject matter expertise are necessary to move standards forward.

Collaboration can also take the form of more focused, specific partnerships. For CGS, we’ve always been ready to admit what we don’t know, seeking the right partner to bring a level of expertise to certain initiatives. That expertise can manifest itself as market knowledge, customer reach, or sources for data that otherwise fall outside of CGS’ normal comfort zone.

From loans to equity options to hedge funds, CGS’ willingness to engage the correct strategic partner has brought fruitful solutions to the industry.

Developing New Standards to Meet Market Needs I 14 Conclusion

Often taken for granted by those who depend upon them most, standards are the backbone of modern commerce. Knowing that a light bulb, regardless of manufacturer, will fit into a lamp, or that rolling freight can get from point A to point B on the same gauge of track adds a layer of certainty to millions of decisions and transactions each day.

In the financial markets the story is no different. Time and again, standards, and the organizations that support them, have been the key to solving some of the financial industry’s most pressing needs when it comes to reference data and unique identification. More than just a numbers game, standards are about reliability, consistency and interoperability – that same ease of use regardless of vendor platform or data environment.

With the proper level of focus on that interoperability, as well as on quality, reinvestment, input and collaboration, few are the reference data problems that standards can’t help solve.

As the industry continues to implement new standards to improve accuracy and streamline communication between global market participants it will be critical that they all speak the same language.

Copyright 2012. All rights reserved. CUSIP is a registered trademark of the American Bankers Association. CUSIP Global Services is managed on behalf of the American Bankers Association by S&P Capital IQ.

Developing New Standards to Meet Market Needs I 15