There’s a new loan entity identifier in town. In partnership with the Loan Syndications and Trading Association (LSTA) and loan data platform Versana, Cusip Global Services (CGS) has released an open-source entity identifier for the syndicated loan market called the CEI (Cusip Entity Identifier).

But the CEI is entering a market that already has an incumbent entity identifier. The MEI (Markit Entity Identifier) was developed by Markit, prior to its merger with IHS, in the early 2010s and is now operated and licensed by S&P Global, which itself merged with IHS Markit. The developers of the CEI say that its creation stems from the closed nature of the MEI and the need for an identifier that can interoperate with trading systems and platforms across the loan market.

As with any shiny new toy in this industry, CEI adoption will not happen overnight, and sources spoken to for this story say that for now, the two will have to co-exist. But industry participants and observers also acknowledge that in due time, one identifier will win out over the other.

New kid on the block

Entity identifiers are essential to Versana’s reason for existence. Formally launched at the end of last year, Versana is a cloud-based, software-as-a-service (SaaS) data platform that aims to provide both the buy and sell side with a centralized golden source of data that would normally be kept in siloed systems. The platform allows agent banks to communicate and send information related to interest payments, paydowns, spread changes, and current outstanding to lenders.

The company was born from a consortium operating under the name Project Sloan that included Bank of America, JP Morgan, Citi, and Credit Suisse. Since its launch, it has added Deutsche Bank, Morgan Stanley, US Bancorp, and Wells Fargo as investors in the platform.

With an entity identifier, lenders can have their funds assigned a distinct and unique code that is sent to the agent banks and allows the agent bank to send relevant information to the appropriate entity. In the case of the CEI, this is a 10-character code with an alpha first character, numeric second character, random characters following, while the last digit is a check-digit. The MEI also operates as a 10-digit code.

“The way the market has functioned historically is with these proprietary identifiers created by the incumbents,” says Cynthia Sachs, chief executive officer of Versana. “They created their own identifiers because once your identifier is propagated into systems, and you’re able to take hold through your proprietary IP, then it helps you to continue building products using that identifier, and you can grow market share that way. It’s a smart way to gain market share.”

For the creation of the CEI, Versana found partners in CGS, which has overseen the Cusip numbering system on US stocks and bonds for more than 50 years, and the LSTA, a trusted trade association with 27 years of history. “Let the experts do what the experts do. Versana has always said from the beginning, we’re not going to build everything. We are not going to create everything ourselves—we need partners,” Sachs says.

The loan market isn’t unfamiliar to CGS, whose relationship with the LSTA goes back 20 years in working with admin agent banks to assign Loan Cusip IDs, says Roger Fahy, vice president of Cusip product and global data operations. “That was quite a successful partnership with the LSTA, to the point where now over 96% of the US market is covered with a Loan Cusip.” Loan Cusips are assigned to deals and the facility (term loan facility, revolving credit facility).

Other contributors to the identifier and its structure included Versana’s advisory board and board of directors, which consists of the founding agent banks, as well as their buy-side advisory committee. Fahy says all the involved parties went through rigorous debate regarding the structure and how deep the CEI should go in terms of identifying a fund.

Per the CEI user guide, legal entities receive one CEI. These entities include corporations, co-operatives, partnerships, banks, limited liability companies, joint ventures, associations, governmental authorities, other financial institutions, and other specifically permitted entities, per the guide. If the legal entity holds an office outside of its primary jurisdiction—in another country, for instance—it will receive an additional CEI for each country in which it operates.

In the case of multi-managed funds, where a fund has more than one manager, each manager will receive a CEI to define and separate that relationship. Additionally, in the case of umbrella funds, which are defined as a single legal entity with distinct sub-funds under it, each sub-fund receives its own CEI.

In 2017, an LSTA working group put forward similar distinctions and guidelines for MEI issuance, which were then published to the LSTA site for members.

License to bill

A source familiar with the CEI’s creation says there was a meeting between S&P and Versana regarding the platform’s proposed use of the MEI, but the two parties could not come to an agreement on licensing terms, such as whether it could fully use the identifier for a fee or within certain parameters.

When asked about the meeting in question and why they couldn’t reach an agreement, a spokesperson for S&P said, “We are always looking to license third parties on fair and appropriate terms. We don’t comment on speculation of specific third-party or commercial engagements.”

In the worlds of market and reference data, licensing fees are always at the top of paying firms’ list of grievances. In the reference data realm, an especially busy last year saw the filing of a blockbuster class-action complaint against CGS, S&P, FactSet, and the American Bankers Association, all of whom make up the past and present owners and operators of the Cusip numbering system. Last month, a federal judge ordered the case to continue, despite the defense’s argument it should be dismissed, based on concerns that the quartet have violated a section of the Sherman Antitrust Act, which outlaws monopolistic behavior, through their licensing and subscription model.

Cusip’s equity and bond identifier, an incumbent in its own right, has also seen challenges, most notably through the introduction of the Financial Instrument Global Identifier, an open, interoperable, and free-to-use identifier that was created by Bloomberg. Though it has received accreditation as a national standard in the US, the Figi is nowhere near becoming the national standard, in the same fashion as Cusip.

In response to a request for comment regarding the introduction of the CEI, S&P Global Market Intelligence provided the following statement to WatersTechnology: “We see the importance of a universally recognized source of truth across the syndicated loan market. MEIs provide unique identifiers for each loan market entity that the industry has relied on for over 15 years to provide transparency, accuracy and consistency in reference data reporting. The introduction of additional identifiers could cause unnecessary confusion amongst market participants and has the potential of undermining the very purpose of unique identifiers.”

Sachs says Versana’s plan has always been to incorporate an identifier, and one that would be able to flow from system to system without any restriction, including licensing fees. In January, she told WatersTechnology that the fragmented loan technology landscape could be aided by creating structure and standards that allow different technologies in various parts of the loan lifecycle—which includes various trading platforms, accounting platforms, and order management systems—to integrate seamlessly.

And though the CEI is open and interoperable, it is, like the MEI, not free. While there are no licensing fees to consume, manipulate, or distribute CEIs onward, there is a cost recovery issuance fee and an annual maintenance fee. The cost recovery fee is $100, while the annual maintenance fee is $50 per CEI. The CEI user guide indicates that there is a 15% discount for bulk requests exceeding 25 entities per single submission on the cost recovery fee.

To put that in perspective, consider a large buy-side firm with 200 funds under management. If each fund is issued a CEI, that is $20,000 spent on the cost recovery fee and $10,000 spent on the annual maintenance—$30,000 all day. Consider the 15% discount, and that firm will spend $27,000 roughly.

Fahy says the CEI system was based on the LEI (Legal Entity Identifier) system in that it is open and free to consume and distribute without any restrictions or need to enter into a use agreement. “This model was vetted with buy- and sell-side participants ahead of launch and the consensus was that a minimal cost recovery fee to sustain the system and support future reinvestment made sense,” he says.

Adopt, adapt or die

Outside of Versana’s efforts around data, some vendors aren’t looking to adopt one identifier over the other. AccessFintech, a trade lifecycle management provider, describes itself as identifier-agnostic. “We allow everyone to operate as they wish and that goes for all of the data,” says Cory Olsen, head of loans at the vendor. “We use other fields to match and to tie the two data points together. We are successfully doing that already with millions of transactions on the security settlement side and already in the loan space.”

Olsen says their offering is already interoperable, as AccessFintech works with multiple vendors, different shops, and different types of shops that each bring their own versions of information to the table. But that interoperability largely comes at the expense of AccessFintech, which must devote tech resources and time into making different data formats compatible, rather than any broad, industry-led solutions.

“There’s never going to be a standard—it’s just never going to happen—so we help create that standard,” she says.

Ellen Hefferan, executive vice president of operations and accounting at the LSTA, acknowledged that for the time being, the CEI and MEI will have to tolerate each other. “ClearPar is the system by which people settle loans. ClearPar is owned by S&P, which also owns the MEI,” she says. “So I think the agents, and all the funds, and insurance companies, or anybody who is involved in this market, will have two fields in their systems: one CEI, one MEI.”

She adds that she doesn’t see likely displacement of the MEI at this juncture.

An individual who has several years of experience working on loan industry platforms says that they see the CEI as starting off on the right foot. “If I had to guess, this new thing has a good start because Cusip has a product, the LSTA can help create the standard, and Versana needs it as a standard because they’re building a product company.” They see the two identifiers running in parallel for a couple of years, then trying to work together somehow.

A different scenario could play out, though, and it will likely come down to choice and luck. Considering the number of large banks that have invested in Versana and who have advised on the CEI, banks could force lenders to adopt the identifier by telling them they will only accept CEIs. On the other hand, market participants could choose to stay with the MEI as it’s already entrenched in their systems, and the task of onboarding the CEI could be too cumbersome.

In any event, sources interviewed for this story agree that it will take at least a few years to get to an inflection point. “In five years, one may win over the other and the other may kind of go away or be subsumed or just run as a smaller, more unique standard,” says the industry source. “It’s not going to play out in a few months.”

Sachs, for her part, argues that any possible scenario will at least result from a healthy competitive landscape: “Everybody wants choices.”