Cusip number

Cusip Number: Definition, Example, and FAQs

A Cusip number is a nine-character alphanumeric code that serves as a unique identifier for most financial security instruments issued in the United States and Canada. As a critical component of financial instrument identification, its primary purpose is to facilitate the efficient clearing and settlement of trades within these markets. Essentially, a Cusip number functions like a unique serial number or a Social Security number for a stock or bond, allowing for unambiguous identification in the vast and complex world of finance.

History and Origin

The origins of the Cusip system trace back to the mid-1960s, a period when the financial markets faced significant challenges due to surging trading volumes. This era, often referred to as the "paper crunch" on Wall Street, led to backlogs in the manual processing of securities transactions. To address these operational inefficiencies, the New York Clearing House Association approached the American Bankers Association (ABA) in 1964. The ABA subsequently established the Committee on Uniform Security Identification Procedures (CUSIP) to develop a standardized method for identifying securities. This initiative led to the creation of the Cusip system, and in 1968, the CUSIP Service Bureau (now CUSIP Global Services) was formed to administer it.²⁹ This standardization was crucial for bringing greater order and efficiency to the burgeoning capital markets.

Key Takeaways

• A Cusip number is a unique nine-character alphanumeric identifier assigned to financial securities primarily in the United States and Canada.²⁸
• It facilitates the streamlined clearing and settlement of trades by providing a universal recognition code for each security.²⁷
• The Cusip system is owned by the American Bankers Association and operated by CUSIP Global Services, which is now part of FactSet Research Systems Inc.²⁵, ²⁶
• Each Cusip number is structured to identify the issuer of the security, the specific issue itself, and includes a check digit for validation.²³, ²⁴
• Cusip numbers are vital for regulatory compliance, accurate record-keeping, and efficient portfolio management.

Interpreting the Cusip Number

A Cusip number is a nine-character code, which can include both letters and numbers, formatted in a specific way to convey information about the security it represents. The first six characters form the "base" or "CUSIP-6," which uniquely identifies the issuer of the security, such as a company, municipality, or government agency.²²

The seventh and eighth characters are known as the "issue identifier," which distinguishes between different types of issues from the same issuer. For example, these characters might differentiate between various equity offerings, such as common stock versus preferred stock, or different debt instruments like various bond series.²¹ Generally, numbers are used for equities and letters are used for fixed income securities.

The ninth and final character is a "check digit." This single digit is mathematically derived from the preceding eight characters and is used to verify the accuracy of the Cusip number through an algorithm.¹⁹, ²⁰ This validation helps in detecting data entry errors and ensures the integrity of the identifier.

Hypothetical Example

Imagine "Diversified Holdings Inc." is a hypothetical company. When Diversified Holdings Inc. issues common equity shares, a unique Cusip number is assigned to these shares. Let's say this Cusip number is 254637105.

Here's how this hypothetical Cusip number would be interpreted:

• 254637: These first six characters identify "Diversified Holdings Inc." as the issuer. This part of the code is consistent across all securities issued by this specific entity.
• 10: These two characters indicate the specific issue type. For common stock, this might be a standard designation. If Diversified Holdings Inc. later issues a series of bonds, they would receive the same issuer code but different seventh and eighth characters (e.g., 254637AA9).
• 5: This final character is the check digit, ensuring the preceding eight characters are valid.

When broker-dealers or other financial institutions process trades involving Diversified Holdings Inc. shares, they use this precise Cusip number to ensure they are referring to the correct security, facilitating accurate trade matching and record-keeping.

Practical Applications

Cusip numbers are deeply embedded in the operational fabric of North American financial markets. They are used extensively by various market participants to identify and track securities.¹⁸

Some key applications include:

• Trade Processing: Broker-dealers, custodians, and institutional investors rely on Cusip numbers to precisely identify securities for trading, clearing, and settlement processes. This standardization reduces errors and streamlines transactions.¹⁷
• Portfolio Management and Reporting: Investment managers utilize Cusip numbers for accurate portfolio management, enabling them to track holdings of individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Many financial statements and reports use Cusip numbers for clear identification of assets.¹⁵, ¹⁶
• Regulatory Compliance: Financial institutions use Cusip numbers to meet various regulatory compliance and reporting requirements set by bodies like the Securities and Exchange Commission (SEC). For instance, certain SEC filings might require the use of Cusip numbers for specific securities.¹⁴
• Corporate Actions: Cusip numbers are essential for processing corporate actions such as stock splits, mergers, acquisitions, and the distribution of dividends, ensuring that the correct shareholders receive the entitlements for their specific holdings.

Limitations and Criticisms

While indispensable for North American financial markets, the Cusip system does have certain limitations and has faced criticism. Primarily, Cusip numbers are designed for securities issued in the United States and Canada, limiting their direct utility in global markets.¹⁰, ¹¹, ¹², ¹³ For international transactions, other identification systems, most notably the International Securities Identification Number (ISIN), are typically required.

Furthermore, the proprietary nature of the Cusip system has been a point of contention. The American Bankers Association owns the Cusip system, and CUSIP Global Services, operated by FactSet, charges fees for the assignment of new Cusip numbers to issuers and licensing fees to data providers and end-users who wish to use Cusip data in their systems.⁹ This commercial aspect has led to past antitrust complaints and discussions about the accessibility and cost of essential financial identifiers, particularly in the context of broader financial data challenges.⁸ Despite these challenges, the system's widespread adoption and reliability within its designated geographic scope underscore its practical importance in financial infrastructure.

Cusip Number vs. ISIN

The Cusip number is often confused with the International Securities Identification Number (ISIN), as both serve to identify financial securities. However, key differences exist:

For example, a U.S. stock might have a Cusip number like 123456789. Its corresponding ISIN would then be US1234567890, where "US" is the country code and "0" is an additional check digit. The ISIN, overseen by the International Organization for Standardization (ISO), aims to provide a globally consistent identifier for securities.⁴, ⁵

FAQs

Who issues Cusip numbers?

Cusip numbers are issued and managed by CUSIP Global Services. This entity operates under the ownership of the American Bankers Association and is currently managed by FactSet Research Systems Inc.², ³

Are Cusip numbers publicly available?

While Cusip numbers are widely used in the financial industry, direct public access to comprehensive Cusip data often requires a license or subscription from CUSIP Global Services or its authorized data vendors. This is due to the proprietary nature of the Cusip system.¹ Individual investors may find Cusip numbers for specific securities through their brokerage accounts or on financial data websites.

Why is a Cusip number important?

A Cusip number is crucial for identifying securities unambiguously. It helps prevent errors in trading, facilitates efficient settlement and clearing of transactions, and simplifies record-keeping for broker-dealers, investors, and regulatory bodies. Without a standardized identifier like the Cusip number, managing the vast number of securities traded on the stock market and bond market would be significantly more complex and prone to errors.