Specific share identification

What Is CUSIP?

A CUSIP is a unique nine-character alphanumeric code that identifies a North American financial security for the purposes of facilitating clearing and settlement of trades. Falling under the broader category of financial market infrastructure, CUSIPs are essential for distinguishing between various types of securities, including equity, debt instruments, and derivatives. This standardized identification system ensures efficiency and accuracy in the complex global capital markets.

History and Origin

The origins of the CUSIP system trace back to the mid-1960s, a period when Wall Street faced a significant "paper crunch" due to surging trading volumes. The manual processes of handling stock certificates and trade confirmations led to extensive backlogs in clearing and settlement activities, sometimes forcing stock markets to close early. To address this operational crisis, the New York Clearing House Association approached the American Bankers Association (ABA) in July 1964 to develop a more efficient, standardized method for identifying securities. This initiative led to the formation of the Committee on Uniform Security Identification Procedures, which in turn established the CUSIP system and the CUSIP Service Bureau in 1968 to administer it. The system was designed to provide a consistent, unique identifier for every security, thereby streamlining processes and reducing errors in the burgeoning financial industry.

Key Takeaways

• A CUSIP (Committee on Uniform Security Identification Procedures) is a nine-character alphanumeric identifier for North American financial securities.
• Its primary function is to facilitate the efficient clearance and settlement of trades by providing a unique identification for each security.
• The CUSIP system was developed in the 1960s by the American Bankers Association (ABA) in response to operational inefficiencies in the financial markets.
• It is widely used by financial institutions, broker-dealers, and regulators for data management, record-keeping, and regulatory compliance.
• The ninth character of a CUSIP is a check digit used to verify the validity of the preceding characters.

Formula and Calculation

A CUSIP is a nine-character alphanumeric code where the ninth and final character is a check digit. This check digit is calculated using a "Modulus 10 Double Add Double" technique, based on the Luhn algorithm, to detect errors in transcription. This algorithm helps ensure the accuracy of the CUSIP when it is entered or processed.

The calculation involves assigning numerical values to each character (0-9 for digits, 10-35 for letters A-Z, where A=10, B=11, etc., and 36-38 for special characters *, @, #). Then, starting from the rightmost character (excluding the check digit), alternate doubling every other digit. If a doubled value is 10 or greater, sum its individual digits (e.g., 12 becomes 1+2=3). Finally, sum all these resulting numbers and subtract the total from the next highest multiple of 10. The result is the check digit.

Let (C_i) be the numerical value of the (i)-th character (from left, (i=1) to (8)).
Let (V_i) be the transformed value of (C_i).
For characters at odd positions (1st, 3rd, 5th, 7th): (V_i = C_i)
For characters at even positions (2nd, 4th, 6th, 8th): (V_i = (C_i \times 2)). If ((C_i \times 2) \ge 10), then (V_i = (C_i \times 2 \pmod{10}) + 1).

The sum (S) is then calculated as:
$S = \sum_{i=1}^{8} V_i$
The check digit (D) is calculated as:
$D = (10 - (S \pmod{10})) \pmod{10}$

This mathematical validation helps in maintaining data integrity across the financial system.

Interpreting the CUSIP

A CUSIP provides clear, concise information about a specific security. The first six characters, known as the "base" or "CUSIP-6," identify the issuer of the security. These codes are assigned alphabetically, with built-in gaps for future expansion. The seventh and eighth characters identify the specific type of issue, differentiating between various classes of fixed income products, common stock, or other instruments from the same issuer. The ninth character, as discussed, is a check digit.

For example, different classes of stock (e.g., Class A vs. Class B) or different bond maturities from the same company will have the same first six characters but distinct seventh and eighth characters. This structure allows for precise identification, which is crucial for accurate trading and record-keeping, supporting robust investment decisions and portfolio management.

Hypothetical Example

Consider "Alpha Corp." as a hypothetical publicly traded company.

Suppose Alpha Corp. issues common stock. It might be assigned a CUSIP like 02079K107.

• 02079K identifies "Alpha Corp." as the issuer.
• 10 identifies this as a specific common stock issue.
• 7 is the check digit.

If Alpha Corp. later issues a series of corporate bonds maturing in 2030, these bonds would share the same issuer identifier but have different issue identifiers. For instance, the bonds might have a CUSIP like 02079KAC5. Here, AC designates a specific bond issue, while the 5 serves as the check digit. This consistency in the issuer portion of the CUSIP helps market participants quickly identify the issuing entity regardless of the specific security type.

Practical Applications

CUSIPs are fundamental to the operation of North American financial markets. They are used extensively by financial professionals for a wide array of activities:

• Trade Processing: CUSIPs ensure that buy and sell orders are accurately matched to the correct security, minimizing errors in clearing and settlement.
• Regulatory Reporting: Various regulatory bodies, including the Securities and Exchange Commission (SEC), require the use of CUSIPs in filings and disclosures to identify specific securities. For example, the Municipal Securities Rulemaking Board (MSRB) mandates underwriters and municipal advisors to apply for CUSIP numbers for new municipal security issues.⁴
• Portfolio Management: Fund managers and custodians rely on CUSIPs for accurate tracking of holdings, valuation, and performance measurement.
• Corporate Actions: CUSIPs facilitate the processing of corporate actions such as stock splits, dividends, mergers, and acquisitions, ensuring that the correct securities are impacted.
• Data Aggregation: Market data vendors and financial analysis platforms use CUSIPs as a key identifier to aggregate and disseminate consistent information about securities. The American Bankers Association (ABA), owner of the CUSIP system, continues to advocate for its use as a standard for federal financial data collection, emphasizing its long-standing role and widespread adoption.

Limitations and Criticisms

Despite its widespread adoption and utility in North America, the CUSIP system faces certain limitations and criticisms:

• Geographic Scope: CUSIPs are primarily North American identifiers. While the CUSIP International Numbering System (CINS) extends its reach to non-North American securities, it is not universally adopted globally, leading to the use of other identifiers like ISINs for international trading.
• Licensing and Cost: The CUSIP system is a proprietary standard owned by the ABA and operated by FactSet Research Systems Inc.³. The licensing fees associated with accessing and using CUSIP data have been a source of contention and litigation, with some market participants arguing that these costs and usage restrictions can stifle innovation and create an uneven playing field.²
• Granularity: While a CUSIP identifies the issuer and issue, it does not provide granular details about a security's specific characteristics (e.g., maturity date or coupon rate for bonds), which must be obtained from additional data sources.
• Flexibility: Once assigned, a CUSIP generally remains static. While helpful for consistency, this can be seen as a limitation if a security undergoes significant structural changes, potentially requiring supplementary identifiers or detailed descriptive data.

CUSIP vs. ISIN

CUSIP and International Securities Identification Number (ISIN) are both crucial identifiers for financial securities, but they differ in their scope and structure.

For securities issued in the U.S. and Canada, the CUSIP often forms the core of the ISIN, acting as the national identifier portion of the 12-character ISIN code. However, the ISIN is distinct due to its country code prefix and a different check digit calculation, making it suitable for international markets where a broader identification standard is required.

FAQs

Q: Who assigns CUSIP numbers?
A: CUSIP numbers are assigned by CUSIP Global Services (CGS), which is operated by FactSet Research Systems Inc. on behalf of the American Bankers Association (ABA).¹

Q: Are CUSIP numbers the same for all securities issued by one company?
A: No. While the first six characters of a CUSIP identify the issuer (the company), the seventh and eighth characters differentiate specific issues or types of securities from that same issuer. For example, a company's common stock will have a different CUSIP than its corporate bonds.

Q: Can I find a CUSIP number for any security?
A: CUSIPs are assigned to most publicly traded North American financial instruments, including stocks, bonds, mutual funds, and derivatives. While public access to CUSIP data may be limited or require subscriptions, they are widely available through financial data terminals and trading platforms.

Q: Why is a CUSIP important?
A: A CUSIP is crucial because it provides a universal and unique identifier that streamlines processes in the financial industry. It helps prevent errors in trade execution, simplifies record-keeping for financial institutions, and is necessary for various regulatory reporting requirements.