Cusip

What Is Cusip?

A Cusip, short for Committee on Uniform Security Identification Procedures, is a unique nine-character alphanumeric code that identifies North American financial securities for the purposes of facilitating clearing and settlement of trades. As a core component of financial identifiers, Cusips are crucial for standardizing the identification of various assets in the market. These identifiers are assigned to most financial instruments, including stocks, bonds, mutual funds, and commercial paper, issued by U.S. and Canadian entities¹⁸. The Cusip system ensures that each security has a distinct identifier, which is vital for efficient trade settlement, regulatory reporting, and accurate portfolio management.

History and Origin

The origins of the Cusip system trace back to the mid-1960s, a period when increasing trading volumes led to a significant "paper crunch" on Wall Street. The manual transfer of physical stock certificates overwhelmed the existing systems, causing backlogs in clearing and settlement activities and sometimes necessitating early market closures to allow back-office processing to catch up¹⁷. To address this operational challenge, the New York Clearing House Association approached the American Bankers Association (ABA) in 1964 to develop a standardized method for identifying securities. This initiative led to the creation of the Committee on Uniform Security Identification Procedures (CUSIP), and in 1968, the CUSIP Service Bureau (now CUSIP Global Services, operated by FactSet Research Systems Inc. on behalf of the ABA) was formed to administer the new system¹⁶. The first Cusip directory was published in December 1968, laying the foundation for modern securities identification and greatly improving market efficiency.

Key Takeaways

• A Cusip is a nine-character alphanumeric code used to uniquely identify North American financial securities.
• It facilitates efficient clearing and settlement of trades by providing a standardized identifier.
• Cusips are assigned to a wide range of securities, including equities, fixed income instruments, and exchange-traded funds (ETFs).
• The system was developed in response to the "paper crunch" of the 1960s to bring order and automation to securities processing.
• Cusip Global Services, owned by the American Bankers Association, is responsible for assigning and maintaining Cusip numbers.

Interpreting the Cusip

A Cusip is not a numeric value to be interpreted in terms of magnitude; rather, it is an identifier, akin to a serial number. The nine-character Cusip code is structured to convey specific information:

• The first six characters form the "base" or "Cusip-6," uniquely identifying the issuer (e.g., a company or government entity).
• The seventh and eighth characters identify the specific issue of the security, distinguishing between different types of bonds or stock classes from the same issuer.
• The ninth and final character is a check digit, used to ensure the validity of the Cusip through a mathematical calculation, helping to detect errors in transcription.

For market participants, knowing the Cusip of a security is crucial for accurate trading, managing brokerage accounts, and ensuring regulatory compliance. It provides a common language across different platforms and institutions, streamlining the flow of market data and reducing the potential for errors.

Hypothetical Example

Imagine an investor wants to purchase shares of "XYZ Corp." an American company. To ensure they are buying the correct stock, their broker's system will use the specific Cusip number assigned to XYZ Corp.'s common stock.

Let's say XYZ Corp. common stock has the Cusip: 987654321.

1. Identification: When the investor places a buy order for "XYZ Corp. stock," the brokerage firm's system internally references the Cusip 987654321. This Cusip uniquely identifies that particular class of equities issued by XYZ Corp.
2. Order Routing: The order, tagged with 987654321, is sent to the market. This unique identifier prevents confusion with other companies or different types of securities (like preferred stock or bonds) issued by XYZ Corp. or other companies with similar names.
3. Trade Matching: When the order is matched with a seller, both sides' systems confirm they are trading the security identified by 987654321.
4. Settlement: Following the trade, the clearing and settlement process relies heavily on this Cusip. The Depository Trust & Clearing Corporation (DTCC) and other entities use the Cusip to track the transfer of ownership and funds, ensuring that the correct securities are delivered and payments are made on time, facilitating a smooth trade settlement.

This example highlights how a Cusip acts as a precise digital fingerprint, essential for accurate and efficient transactions in the complex world of securities.

Practical Applications

Cusips are foundational to the operational efficiency of global financial markets, serving numerous practical applications:

• Trade Processing: They are indispensable for the precise identification of securities throughout the trading lifecycle, from order entry to trade settlement. The standardization provided by Cusips helps reduce errors and delays in processing transactions, underpinning rules set by bodies like the SEC and FINRA¹⁴, ¹⁵. For example, FINRA Rule 6730, which governs transaction reporting for TRACE-Eligible Securities, often relies on Cusip numbers for accurate and timely reporting of fixed income transactions¹², ¹³.
• Regulatory Compliance and Reporting: Financial institutions leverage Cusips to meet various regulatory reporting requirements. Regulators, including the Securities and Exchange Commission (SEC), require the use of standardized identifiers like Cusips for market surveillance, risk management, and maintaining transparency in the securities market¹¹. The SEC's Rule 15c6-1, which governs the standard settlement cycle for securities transactions, implicitly relies on clear security identification, where Cusips play a key role in ensuring that the right securities are settled in the appropriate timeframe⁹, ¹⁰.
• Portfolio Management: Investors and asset managers use Cusips to track and manage their diverse asset classes, including stocks, bonds, and options. Accurate Cusip identification is critical for maintaining precise records, calculating performance, and complying with internal and external auditing requirements in portfolio management.
• Market Data Systems: Vendors of market data and financial information services incorporate Cusips into their databases to allow users to precisely search for, analyze, and monitor specific securities. This ensures that data on pricing, trading volume, and other metrics is correctly attributed.
• Corporate Actions: Cusips are used to manage and process corporate actions such as mergers, stock splits, and dividend payments, ensuring that the correct shareholders receive their entitlements for the specified securities.

Limitations and Criticisms

While Cusips are indispensable for North American financial markets, the system is not without its criticisms, primarily centered on its proprietary nature and associated costs. The Cusip system is owned by the American Bankers Association and operated by CUSIP Global Services, a division of FactSet Research Systems Inc.. This private ownership has led to concerns about licensing fees charged to data providers and, in some cases, directly to end-users⁸.

Critics argue that this fee structure, particularly for what is considered a fundamental identifier in the financial ecosystem, can create a barrier to entry or add significant costs for market participants⁷. Allegations of anti-competitive practices have surfaced, with some claiming that the proprietary control over Cusips restricts competition in financial data services by demanding licensing agreements for their use⁶. While CUSIP Global Services asserts that its system provides essential transparency and reliability, the debate over the balance between proprietary control and public good for financial identifiers continues within the industry⁵. These critiques underscore the broader discussion about open standards versus proprietary systems in critical financial infrastructure.

Cusip vs. ISIN

Cusip and International Securities Identification Number (ISIN) are both codes used to identify financial securities, but they differ in their scope and structure.

The main point of confusion often arises because, for U.S. and Canadian securities, the nine-character Cusip number is incorporated directly into the 12-character International Securities Identification Number. This means that if a security has a Cusip, its ISIN will include that Cusip as part of its structure, preceded by a country code and followed by a check digit. Therefore, while a Cusip is sufficient for domestic transactions, an ISIN is required for international trading and regulatory purposes to ensure global uniformity and recognition.

FAQs

What types of securities are assigned Cusips?

Cusips are assigned to a wide array of financial instruments issued by U.S. and Canadian entities. This includes common stocks, preferred stocks, corporate bonds, municipal bonds, U.S. government bonds, commercial paper, certificates of deposit, mutual funds, and exchange-traded funds (ETFs)². Essentially, most publicly traded or registered securities in North America will have a Cusip.

Who assigns Cusip numbers?

Cusip numbers are assigned by CUSIP Global Services (CGS), which operates on behalf of the American Bankers Association (ABA)¹. CGS is responsible for the overall administration and maintenance of the Cusip system, ensuring the unique identification of all covered securities.

Why is a Cusip important for investors?

For investors, a Cusip helps ensure that they are trading and holding the correct security. It provides a precise, universally recognized identifier that eliminates ambiguity when buying, selling, or tracking investments in their brokerage accounts. This standardization helps prevent trading errors, streamlines transaction processing, and supports accurate record-keeping for various asset classes.