Banks hint at legal challenge to new interagency security tracking rule

Bloomberg News

WASHINGTON — The American Bankers Association has raised concerns over a proposal by nine federal agencies to replace an industry-owned, widely used labeling standard for identifying and tracking financial securities as part of regulators' implementation of the Financial Data Transparency Act.

ABA said the agencies' proposal to compel financial markets to use a new open-source tracking system — Bloomberg's Financial Instrument Global Identifier, or FIGI — for financial reporting purposes arbitrarily exceeds statutory authority. 

Regulators currently mandate that firms use an alphanumeric identification system run by ABA's Committee on Uniform Securities Identification Procedures. CUSIP numbers are used by regulators to identify financial securities, including stocks, bonds, and other financial instruments. Accessing CUSIP data requires a subscription, and the fees ABA charges for access vary based on the data's scope and type.

"The Agencies have acted both outside the FDTA's statutory mandate and arbitrarily and capriciously under the APA," the bankers group wrote in a letter dated Tuesday. "CUSIPs are the required means of identifying financial instruments for nearly every financial reporting form collected by the agencies, as well as the underlying identifier for a myriad of agency operations including Treasury issuances, Treasury Auctions, and MBS CUSIP Aggregation."

The issue at question is whether the FDTA's requirement of a nonproprietary legal entity identifier to be available under an open license extends to all common identifiers, including financial instrument identifiers. ABA said the proposal incorrectly applies the open license requirement to financial instrument identifiers and that the FDTA only requires a "common nonproprietary legal entity identifier" to be available under an open license, rather than mandating that all identifiers must be non proprietary and open.

The law requires agencies to create data standards that establish common identifiers for legal entities available under an open license. The agencies proposed using the FIGI instead of CUSIP and the International Securities Identification Number systems because the latter two are proprietary and not open license. The rulemaking comes amid an emphasis by the Biden administration on non-proprietary and open-license identifiers to promote transparency, reduce costs and avoid monopolistic practices in the financial data industry.

"The FIGI provides free and open access and coverage across all global asset classes, real-time availability, and flexibility for use in multiple functions [and] also can be used for asset classes that do not normally have a global identifier, including loans," the agencies wrote in the proposal. "The Agencies also considered CUSIP and the ISIN … [but] while these identifiers are widely used, they are proprietary and not available under an open license in the United States."

ABA contends that the proposal to adopt the FIGI arbitrarily exceeds the FDTA's mandate, lacks a proper cost-benefit analysis and would cause significant market disruption due to the FIGI's non-fungibility and limited data accessibility compared with CUSIP.

"ABA receives revenue from CUSIP licensing, but as our letter makes clear the issues in play here really go beyond any financial interest," an ABA spokesperson said in an email. "This is about avoiding a disruption to market participants around the world who have come to trust and rely on CUSIP for more than 60 years. Bloomberg also has a strong financial interest in FIGI, which will help drive terminal sales."

While ABA contests the rule's statutory authority to expand open-source requirements to financial instrument identifiers, statements by policymakers indicate the law is intended, at least in part, to make financial data more accessible including by the usage of "open data assets." 

The bill's main architect, Sen. Mark Warner, D-Va., has said the FDTA intends to make financial information more accessible.

"The FDTA is designed to modernize the collection and dissemination of financial data by federal financial regulators, making that information more accessible, more uniform, and ultimately more useful to investors and consumers," the senator wrote in a release. "The Treasury Department and seven key regulators will jointly develop new standards, leveraging other data modernization efforts to streamline compliance and align data collections with government-wide policies for 'open data assets.'"

The question of whether Congress intended for the replacement of CUSIP with the FIGI to align with the law's stated goals is debatable. This uncertainty is underscored by Securities and Exchange Commission Commissioner Hester M. Peirce, who, while supporting the issuance of the proposal, encouraged commenters to address this specific issue in their feedback following the release of the proposed rule.

ABA suggests the rule proposed by the nine federal agencies might violate the Administrative Procedure Act because it also lacks a proper cost-benefit analysis and a thorough examination of economic impacts. To allow for a more detailed review and feedback from stakeholders, ABA requested agencies extend the comment period by an additional 60 days.

"Each instance where CUSIP would be replaced with FIGI has its own potential economic impact given how widely CUSIP is used, each with  its own different stakeholders, risks, and potential disruption," ABA wrote. "[With the joint proposal] the Agencies risk saddling each individual Agency with the task of promulgating regulations that disrupt the entire ecosystem of financial reporting, absent any statutory mandate to do so, all without  first considering the economic impacts and costs and benefits of such a decision."