Waters Wrap: The drama within reference data

This is a bit “inside baseball,” but WatersTechnology has two main areas of coverage as it pertains to the wholesale capital markets: technology and data. So, for the former, it’s trading tools like order management systems, risk systems, and post-trade reconciliations platforms. On the data front, it’s market data, reference data, and then the catchall of alternative data.

Depending on your job title, there are some stories that will be of more interest and some you really couldn’t care less about. If we’re doing our job well, we’re delivering enough value on all fronts to help you do your job better and keep you as informed as possible about new ideas permeating the capital markets. Of the stories we write, the hardcore reference data stories tend to do lower numbers than articles about market data. But, I’d also say that our reference data readers are the most passionate of our subscribers.

Thus, this column aims to hopefully alert people who might not care as much about reference data to some really interesting things happening in the space that could have a big impact on firms—and their bottom lines.

The Cusip case

First up, the potentially earth-shaking lawsuit moving its way through the Southern District of New York courthouse is centered on Cusip numbers. A very quick recap from Reb Natale, who has been all over this case:

The saga began in March of last year when New York-based broker-dealer Dinosaur and Swiss Life, and then Connecticut-based asset manager Hildene, filed two class actions days apart from each other against Cusip Global Services (CGS) and S&P Global, CGS’s long-time operator; the American Bankers Association (ABA), CGS’s patent holder and creator; and FactSet, the data and research provider that purchased CGS from S&P in 2022 for nearly $2 billion. The European Commission had previously stipulated that S&P divest CGS as part of its merger with IHS Markit, ending a 53-year operation of CGS by S&P on behalf of the ABA.

In addition to their claims that the quartet of companies had violated sections 1 and 2 of the Sherman Act, the plaintiffs also alleged—in a combined complaint—breach of contract and state business law violations after also seeking a ruling on whether individual Cusip codes are copyrightable.

Well, last month, federal judge Katherine Polk Failla dismissed all claims except for the complaint related to Section 2 of the Sherman Act, which will be allowed to proceed to discovery. This might just be my reading of it, but Polk Failla had some seemingly harsh words for the defendants.

“The antitrust concerns of this case instead arise because defendants, through their restrictive agreements with third-party data vendors, have created a system designed to prevent any competitive uses of Cusip numbers,” she wrote.

She also wrote: “The court is not concerned, from an antitrust perspective, that plaintiffs must pay for access to CGS data. Rather, the issue is that defendants arguably have no legitimate purpose in forcing the plaintiffs to sign subscription agreements” when the trio receives CGS data from third parties, not the defendants; and they do not receive the full, copyrighted database from their vendors, but instead datafeeds containing individual Cusip codes that are otherwise non-protectable. The plaintiffs argued earlier that the Cusip database was subject to the same copyright protections as a phonebook, but the individual codes were as free to use as phone numbers.

If the plaintiffs win, it would completely upend the cost structure currently in place for Cusips in North America, as the nine-digit number is the most widely used identifier of its kind and functions as a unique barcode on all stocks and registered bonds in the US and Canada.

A couple of things to keep in mind: one, no tier-1 bank or asset manager has joined the class-action lawsuit; and two, there are some in the industry who believe that the Depository Trust & Clearing Corporation (DTCC) should be involved in this lawsuit. Here’s what one data executive told me:

“The entire US settlement and clearing is predicated on that special nine-character number; you can’t operate without it—that’s what is lost on the industry, regardless of the court’s actions. The DTCC accepts one and only one identifier for settlement and clearing. Every single trade that is cleared and settled in the US goes through DTCC, which has its ‘relationship’ with Cusip. DTCC, by its actions of only accepting Cusip, means firms still have to subscribe. It’s baked in. You want to trade, settle and clear in the US? DTCC requires a Cusip as part of the order submission.”

(The DTCC declined to talk to me for that column.)

The deadline for the defendants to answer the complaint has been extended from August 7 to September 8, 2023; the deadline for parties to file a proposed scheduling order and civil case management plan has been extended from August 14 to September 13, 2023. (h/t Tim Baker, who is an excellent follow on LinkedIn.)

Questions surround new loan market identifier

About a month ago or so, Nyela Graham said she wanted to write a story about a new loan entity identifier that’s been released. I was like, “Jesus, that’s pretty niche, but sure, go for it.” Well, as it turns out, there’s a bit of drama there, too.

In partnership with the Loan Syndications and Trading Association (LSTA) and start-up loan data platform Versana, CGS has released an open-source entity identifier for the syndicated loan market called the CEI (Cusip Entity Identifier). As Nyela writes:

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.

Now, first, how great is it that you once again have CGS and S&P Global, but this time they’re not on the same page? God, I love writing about the capital markets.

More importantly, though, is that it’s true with most data, there are fees that firms will have to consider. Once more, Nyela writes:

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.

Sources told Nyela that it will take some time to see which identifier wins out, CEI or MEI, but people do believe that it will eventually shake out to where there’s just one.

“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,” said one source. “It’s not going to play out in a few months.”

Or, maybe there’s another class-action lawsuit years down the line that we’ll get to write about.

Gleif’s (and others’) efforts around vLEI

Covering reference data can be challenging—there are millions of acronyms, archaic structures, and complex nuances that have to be clearly explained, which inevitably turns most reference data stories into thousand-plus word behemoths. I don’t often write about reference data…fortunately I have other reporters who handle that particular dirty work. And there’s nothing like having new reporters to throw into the deep end.

Theo Normanton’s first article for WatersTechnology was published in December and was about the Association of National Numbering Agencies (ANNA) being on track for a recent review of the International Securities Identification Number (Isin). Perhaps a glutton for punishment, he’s kept on writing about the reference data community.

Most recently, he wrote about the efforts to get wider adoption of the verifiable legal entity identifier (vLEI). The vLEI, which is already in production, is essentially a digital ID card. In theory, it would allow the holder to automatically confirm their identity in any digital interaction.

As Theo wrote:

As the name suggests, it is a digitally verifiable version of the legal entity identifier (LEI), a 20-digit code that uniquely identifies legal entities around the world that can participate in financial transactions. The vLEI is an LEI encased in a data container that’s cryptographically signed with the user’s private key. It can be presented to counterparties in digital interactions, and those counterparties can automatically verify that it comes from the key’s owner.

There are already over 2 million LEIs and counting, but the introduction of digital verification is a crucial step forward in an increasingly digital world. While the LEI and other identifiers are effective at verifying entities, they are not the silver bullet of identity management because they cannot prove authenticity, offering determined fraudsters a path to victims. But a trusted verification system—something that proves a person is who they say they are—can offer a way around the persistent problem of trust.

The LEI, which is overseen by the Global Legal Entity Identifier Foundation (Gleif), has struggled to reach critical mass since its introduction. So, I guess it’s not too surprising that the vLEI is also seeing slow uptake, but the benefits could be significant.

“It will demonstrate that digital communications can be signed,” says Randy Warshaw, CEO of startup Provenant. “And if you can do that in telecoms, certainly you can do it in transactions, in supply chains, in regulatory document filings and submissions. Suddenly, people will see the possibilities for signing every digital thing.”

More identifier options for OTC derivatives

Ok, one more recent story for you. And just like how Theo’s first story was about reference data, so too was Emma Hilary Gould’s, who is our most recent hire.

Emma Hilary, aka EH, spoke with the Derivatives Service Bureau about how DSB has opened up its user acceptance test (UAT) environment for the Unique Product Identifier (UPI) to include the use of identifiers other than Isins. The UAT, which was launched in April, uses the identification from a derivative’s underlying asset, known as an underlier identifier, to issue a UPI for over-the-counter derivatives.

Emma Kalliomaki, managing director of the DSB, told her that participants in the UAT environment can now map a Sedol, Cusip, and Figi identifier onto an Isin and request a UPI from the DSB. The DSB partnered with SmartStream and the Intercontinental Exchange (ICE) to enable the inclusion of alternative identifiers.

“The UPI is essentially the baseline for authorities to aggregate the data they need to carry out their supervisory functions,” Kalliomaki said. “Because the UPI is a global initiative, those jurisdictions who have not yet implemented OTC Isin wanted to enable firms in their jurisdictions to leverage the workflows they may have already been using.”

From Emma Hilary’s story:

ICE will provide the cross-referenced data between identifiers for fixed income and equities, while SmartStream will act as the data aggregator, bringing data from disparate sources together to a single point of contact for the DSB.

“The SmartStream service will allow the DSB to traverse from the identifier the user submits to the corresponding Isin. The Isin is ultimately required to create the OTC UPI,” said Linda Coffman, executive vice president of reference data at SmartStream.

A representative from ICE says that as part of the cross-reference symbology process, “ICE will send data files to SmartStream directly.” Then, SmartStream will work as an aggregator in retrieving the ICE underlier data. “SmartStream will process the data from ICE on behalf of the DSB and then cross-reference that data to additional identifiers as needed,” Coffman adds.

While this is not a definitive list of all reference data stories that we’ve written about this year, it’s a good recap of the past month or so. With that said, if you think there’s anything we’re not hitting on enough, please do let me know: anthony.malakian@infopro-digital.com.