FDTA proposal suggests shift away from CUSIPs as bond identifier

The first glimpse of proposed rules for the closely watched Financial Data Transparency Act carried a surprise for the municipal bond market.

The Federal Deposit Insurance Corporation board Tuesday approved a draft notice of proposed rulemaking for the FDTA. Enacted in December 2022, the law requires that municipal securities disclosures be converted into a machine-readable format.

The FDIC is one of seven federal agencies that, with the Securities and Exchange Commission and Municipal Securities Rulemaking Board, will play a role in the complex, joint rulemaking process that will craft final guidelines. A final notice of comment for rulemaking may not be finalized for a few months.

The FDIC proposal released Tuesday may be revised based on public comments.

Market participants like Marc Joffe, a policy analyst at the Cato Institute who has been closely following the FDTA, said the biggest surprise was language showing that regulators may prefer that securities be identified by a so-called Financial Instrument Global Identifier, or FIGI. That would mark a big shift away from the traditional nine-digit alphanumeric CUSIP that is now used to identify each individual bond, Joffe said.

"We were not expecting much of this particular release, so this was quite a surprise," Joffe said of the FIGI proposal. "It's the most consequential thing that came out of the whole release."

The FIGI is based on Bloomberg's Open Symbology, a system Bloomberg developed for identifying securities across all global asset classes. The draft proposal noted that FIGI is "a global non-proprietary identifier" that's available under an open license.

"The FIGI provides free and open access and coverage across all global asset classes, real-time availability, and flexibility for use in multiple functions," the proposal said. "The FIGI also fills the gap for asset classes that do not normally have a global identifier, including loans."

The regulator said it also considered the CUSIP, but that it's "proprietary and not available under an open license in the United States."

Joffe notes that the regulators do not have the authority to stop asking for CUSIP numbers. But they can require that any filings with agencies, including the SEC and MSRB, are required to use a FIGI.

Bloomberg already assigns a FIGI to municipal bonds, he added. "So it would be feasible for the MSRB to swap out CUSIPS with FIGI, and that has enormous implications for Bloomberg, for FactSet [which owns CUSIP Global Services] and for everybody else."

For issuers, the draft proposal included few surprises and no specific technical requirements at this stage, said the Government Finance Officers Association in a note. The group noted that final requirements for municipal issuers will come from the SEC, not the FDIC. "When the Notice of Proposed Rulemaking is officially released to the public, GFOA will ensure that issuers understand the required comments and timeline. That will not likely occur for several weeks."

The GFOA's message for now to local governments and states: remain "cautious of any resources or 'solutions' suggesting final FDTA requirements."

FDIC Chair Martin J. Gruenberg released a statement after the Tuesday board vote saying he supports the proposal.

"Having relevant and accurate information has always been an essential element of effective financial regulation," Gruenberg said. "The establishment and subsequent adoption of data standards across the nine agencies that are issuing this proposed rule will advance the greater use, sharing, and interoperability of the information collected by the agencies."

Each agency involved in the rulemaking will have its own approval process and the notice may change as it moves through the process, said a source familiar with the process. FDTA rules are set to be in place by the end of 2024.

The timeline calls for final rulemaking to be released in December, with the SEC publishing proposed muni market-specific standards in 2026, followed by the MSRB's proposal and call for comments. By the end of 2026, the SEC is expected to issue its final rule for municipal market standards with the effective dates coming in 2027 or after.