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 move, based on standards developed by Bloomberg, aims to bring more transparency to financial markets by making disclosures machine-readable and moving away from reliance on PDFs.
Matthew Bastian, senior director at CUSIP Global Services, expressed concerns about the lack of clarity in the decision-making process. He highlighted efforts behind closed doors to expand the scope of the Financial Data Transparency Act (FDTA) to include security-level identifiers, which are not explicitly mentioned in the text of the proposal. Bastian emphasized the importance of the CUSIP system in the municipal bond market, citing its reliability and granular features that are integral to market operations.
The proposed switch from CUSIP to FIGI could have a profound impact on the municipal bond market. CUSIP outlined major downsides to the industry moving to FIGI, including its lack of fungibility. Fungibility, the ability of a financial instrument to be traded with the same identifier regardless of the trading venue, is a critical aspect of market efficiency and liquidity. The potential operational challenges posed by the change to FIGI could disrupt market dynamics and lead to costly implementation processes.
The FDIC is collaborating 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 imposed by the FDTA will be implemented. The SEC is taking a leading role in implementing the FDTA, which was signed into law in 2022. The joint effort aims to streamline the transition to FIGI and ensure that financial market participants can adapt to the new system effectively.
The Object Management Group (OMG), a computer industry standards consortium, has expressed support for the adoption of FIGI as the common identifier for financial instruments. David Blaszkowsky, financial sector domain task force co-chair at OMG, highlighted FIGI’s innovative data management approach and adherence to open data principles and technical methodologies. OMG believes that FIGI fulfills the requirements for identifying a full range of financial instruments, including municipal securities.
The proposed switch from CUSIP to FIGI represents a significant shift in how financial instruments are identified in the municipal bond market. While the move aims to enhance transparency and standardization, it also poses challenges and risks for market participants. Industry stakeholders must collaborate effectively to ensure a smooth transition to FIGI and address any potential operational and regulatory hurdles that may arise. As the SEC takes the lead in implementing the FDTA, market participants will need to closely monitor developments and prepare for the changes ahead.