Despite client concerns, LSE’s new Sedol fees take hold

Five months into the rollout of a new pricing policy for its Sedol global identifier code, some of the London Stock Exchange’s data clients have not yet signed a declaration acknowledging the new fees. And while LSE officials say the number of holdouts is dwindling, some client firms—and the industry associations that represent them—continue to voice objections to the new policy.

The LSE says the changes reflect a significant expansion of Sedol codes over the past decade, and a more equitable fee structure, which in the past did not fairly represent usage across the spectrum of clients, especially the largest firms.

We agree it’s reasonable to pay some kind of increase, but not that much.

Data executive at a large European bank

James Nevin, managing director and head of fund and research products at the LSE, says that over the last decade, the exchange has expanded the number of Sedols from 1.2 million, which were largely focused on UK securities, to a global, multi-asset identifier numbering more than 110 million, of which 20 million are live securities. 

In addition, within the last year, the exchange has added API access to Sedol codes, and has increased the refresh rate from three times per day to hourly, and extended Sedol codes to cryptocurrencies and other digital assets.

However, user groups that represent LSE clients among buy- and sell-side firms say the increases are “unreasonable and unfair,” as the exchange is increasing costs without adding value.

The key policy change moves away from assessing fees based on the number of legal entities within a firm that consumes Sedol codes, to a model based on the number of business segments that consume Sedols in different regions. 

For those with “limited” user licenses (i.e., those using fewer than 10,001 Sedol codes), fees will not change. A firm in Band A (which uses fewer than 1,000 Sedol codes within one legal entity) would pay £860 (~$1,200) per year. A firm in Band B (1,001 to 5,000 Sedols) would pay £2,715. And a firm in Band C (5,001 to 10,000 Sedols) would pay £8,925. Distribution licenses (which allow firms to distribute Sedol data to licensed third parties) for the same bands would be £795, £2,475, and £13,315, respectively.

The fees resulting from the policy change will be phased in over two years, starting from January this year, with 50% of the increase taking effect in 2021, and the remainder in 2022. 

During the “transition year” of 2021, the LSE will calculate fees based on a combination of its old legal entity-based model and the new business segment and region-based model. So during 2021, firms with unlimited user licenses (more than 10,001 Sedol codes) will be covered by three further bands of usage and fees: Band D (more than 10,001 Sedols used by one legal entity) will cost £29,070. Band E (more than 10,001 Sedols used by up to five legal entities) will cost £91,865. And Band F (more than 10,001 Sedols used by six or more legal entities) will cost £121,310.

When the new policy takes full effect next year, firms will pay fees ranging from £35,000 for usage of more than 10,000 Sedols by one business segment in a single region up to £251,000 for usage by more than five business units across more than three regions (see fee matrix, below).

Full details of the policy are available on the LSE’s website, along with an online fee calculator to help firms understand how much they should pay.

Between 700 and 800 client firms will be affected by the policy, Nevin says. The vast majority of clients will either see no fee increase or will actually see their Sedol costs fall as a result of the new policy, but he acknowledges that larger firms will see costs rise—in some cases, significantly.

“Around 30% of that affected part of the client base have seen a price decrease, and around 45% are fairly flat or have seen an increase of less than £10,000. Obviously, that leaves about 25% whose fees have gone up—some significantly,” Nevin says. “Generally, the rebasing of the policy better aligns with the differentiated usage across our customer base. We had a lot of mid-range clients who were previously at the same level as big banks, and those levels now more appropriately reflect usage across the client base.”

Based on market data user groups’ assessment, the vast majority of members are significantly impacted by the new licensing model imposed by the LSE on Sedol identifiers. In other words, all or most sizes of firms are impacted and see significant increases of their Sedol licenses.

 Cossiom executive

The policy also offers degrees of flexibility: For example, if a firm has a global equity research arm based in the UK that would fall in the 10,000+ Sedol usage tier, but also has a US business that only trades US equities and would therefore use fewer Sedols, the firm’s contract could reflect those different tiers of usage.

“Our sales team helps maximize the policy for clients’ benefit. We don’t just automatically throw them into the highest tier,” Nevin says.

Indeed, one market data manager at a brokerage falling within the lower tiers confirms that his firm is not impacted by the change, but also notes that the firm deliberately “barely uses Sedol” specifically because of the cost.

However, a data executive at a large European bank says its Sedol costs will increase by 200% under the new policy, even though the bank’s use of the codes is not changing. “We agree it’s reasonable to pay some kind of increase, but not that much,” says the source.

‘We’re trying to treat the overall market fairly’

The LSE denies it is using a monopoly position to wring more fees out of customers. First, it says the overall increase is not so big, and second, it says there are alternatives to Sedol. “Overall, yes, we are making money from the policy change, but not as much as clients may think,” Nevin says. Under the old policy, prices grew at a 3% compound annual growth rate between 2010 and 2020, while the new policy would see CAGR for the period 2010 to 2022 as the policy takes effect rise to 3.9%, he says.

“Most of the feedback has been positive because most firms’ fees have gone down or remained flat. I’m not going to say everyone is happy about it … but even though the larger-tier firms don’t like increases, most understand why we’re doing this, and that we’re trying to treat the overall market fairly.”

He says the majority of clients—though not all—had signed a declaration for the new policy by the January 1, 2021, effective date, and the number outstanding is becoming smaller as time goes on. Nevin says LSE has approached this by working with firms on a client-by-client basis to understand their individual pain points and reasons for delaying.

“For example, some are not pushing back on the policy, per se, but … because it is widely used, they need to analyze their internal use and do due diligence,” he says.

In an attempt to minimize these delays to adoption and make the transition as smooth as possible, the LSE engaged with UK-based industry user group Ipug and French user association Cossiom to conduct surveys of their memberships. This follows an attempt to revamp the Sedol policy in 2018, which the LSE ultimately abandoned after significant pushback from clients, deciding instead to try to engage the industry in creating the new policy.

“In 2018, we looked to do a fairly crude tweak to our commercial policy … based on how many legal entities used Sedol within an organization. And we got some decent pushback. Clients said legal entities weren’t a good measure of usage,” Nevin says. “So at that point, we went into a period of consultation, including more than 40 meetings with clients and industry bodies. That concluded at the end of 2019, and we announced the new policy early in 2020, with implementation starting in January 2021, phasing in over two years.”

However, though Nevin says feedback has been mostly positive, the user groups aren’t satisfied with the results, and take issue with the LSE’s assertion that only the largest firms will be affected by the changes, saying that the multiple dimensions of the licensing model make it hard to optimize usage, and therefore tacitly encourage firms to sign up for higher-tier licenses.

“Based on market data user groups’ assessment, the vast majority of members are significantly impacted by the new licensing model imposed by the LSE on Sedol identifiers,” says a Cossiom executive. “In other words, all or most sizes of firms are impacted and see significant increases of their Sedol licenses. We don’t acknowledge that only big firms are impacted,” adding that in a letter to the LSE last year objecting to the changes, Ipug stated that 80% of members reported “unacceptable cost increases of greater than 80%, and one in three firms reported increases of more than 100%.”

The user groups are also unhappy that the LSE began its consultation by working with them to survey members in a constructive way, but then they say the exchange did not incorporate their feedback, and declined to work further with them, instead negotiating individually with firms. 

Nevin says user groups proved very helpful in terms of translating feedback from their members, but adds that once the policy change took effect at the start of this year, the LSE felt that any further dialogue should be conducted with firms on an individual level.

‘Resistance, resentment, but resignation’

The user groups continue to object to the new policy, and advise members against signing it, but ultimately, they have few options. If any firm refuses to sign the declaration, LSE can turn off that firm’s supply of Sedols, by asking its vendors to switch off the codes to that client. “That’s not easy, because most big firms take Sedols via multiple vendors. But I don’t think it will come to that,” Nevin says, adding that the exchange has not lost any Sedol clients yet as a result of the new policy.

But clients say Sedol codes are a necessity, even if their UK trading activities are relatively small. “We cannot just stop using Sedol codes; we need those codes in our systems. If we don’t have the codes, we can’t trade,” says the European bank data executive.

The Cossiom exec concurs, adding: “We believe that a firm does not have the option to use Sedol or not. Sedol identifiers are embedded into too many information systems and too many workflows. They are indispensable to ensure interoperability across the financial industry and for clearing on UK markets. A firm cannot decide not to use Sedol identifiers.”

Given this industry dependence on Sedols, particularly for trading on UK markets, “It might be very difficult or even impossible for most financial institutions (notably tier-one and tier-two buy- and sell-side firms, and securities services firms) not to use Sedol identifiers anymore,” the Cossiom executive adds.

Nevin adds that—while still best-known for their uses supporting trading and post-trade clearing and settlement—Sedols are used across firms’ entire investment lifecycles, including for valuation.

“The value is not just the code itself, but that it validates an amount of fundamental data that it represents, and that you can use it to map that web of underlying fundamental data. So the code is not just one data point—it’s that mapped data so you can match trades and map to research data,” Nevin says.

Among end users, there is “resistance, resentment, but ultimately resignation” toward the Sedol policy, says one industry consultant familiar with the situation, adding that this reflects a worrying trend of data providers increasing fees but engaging less with the clients who are subject to those fees. Ipug, for example, is developing a scorecard-based rating for all suppliers that the user group hopes will better inform consumers and regulators, and will positively influence suppliers’ policies and encourage more engagement.

The Cossiom executive also says user groups must remain important for collectively representing their members in negotiations where they believe policies have industry-wide impact. 

“We believe it is our duty to take the right time and share our concerns with vendors when it is believed that a new commercial model or initiative is not relevant or reasonable,” says the executive. “When most market data user groups across Europe believe that a new commercial model is not reasonable, it should not be unrealistic that the vendor listens to clients, reviews its model, and comes back with something acceptable. This is what user groups expect to achieve.”