Following 10 months of deliberation, the European Commission has finally released its preliminary findings on its inquiry into Standard & Poor’s pricing practices concerning International Securities Identification Numbers (ISINs). According to its recent memo, the Commission considers the vendor to be “abusing its dominant position” as the sole appointed National Numbering Agency (NNA) for US securities by requiring its European customers to pay licensing fees for the use of ISINs in their own databases.
As the sole issuer and disseminator of ISINs in the US market, the Commission contends that S&P’s Cusip Global Services (CGS) business is practicing unfair pricing and is therefore in infringement of Article 82 of the EC Treaty concerning rules on abuse of a dominant market position. The regulator’s recent statement of objections on the matter is the culmination of its investigation, which began on 12 January, into S&P’s ISIN charging practices.
“This preliminary finding is based on, inter alia, a comparison with the charging policy of other NNAs that either do not charge any fees at all or, if they do, do so only on the basis of the distribution cost as opposed to usage, according to International Standards Organisation (ISO) principles,” says the Commission in its statement.
In return, S&P has published an official statement claiming that it “strongly disagrees” with the EC’s preliminary assessment and believes the Commission has “grossly undervalued S&P’s effort, expertise and costs required to operate a global identification system that benefits millions of investors and market participants worldwide.”
The vendor continues: “Standard & Poor’s and CGS are reviewing the Commission’s position and its implications for CGS’s data service business in Europe. Most importantly, CGS remains committed to meeting the needs of the market by continuing to provide data services to facilitate clearing and settlement globally.”
In order to come to its conclusion, the Commission has been examining the license fees for the use of ISINs, as well as certain descriptive elements attached to these instrument identifiers, each time a code is used to access information. Annual license fee costs for a typical asset management operation run out to US$25,000-US$30,000 on average, according to the Commission. S&P’s CGS business has been charging these European firms for this service since 2003.
According to the Commission’s preliminary findings, S&P does not incur any costs for the distribution of US ISINs to financial service providers because the latter do not receive the ISINs from S&P but from information service providers such as Thomson Reuters or Bloomberg. These practices also involve financial institutions being forced to pay for services such as the ISIN database, which the Commission has previously described as “a service that they are not interested in and do not actually use”.
“Moreover, it is alleged that S&P forces its contractual partners, the information services providers, to cut off financial institutions from data feeds on US securities unless the latter enter into licensing agreements with S&P for the use of US ISINs,” the Commission states.
According to the Commission, the proceedings were prompted by official complaints made by “several” associations representing investors. However, complaints regarding S&P’s pricing practices around ISINs in Europe are not a new development. S&P has been battling against negative perception of its pricing policies for securities identifiers for some time.
The vendor has eight weeks to reply to the statement of objections and will then have the right to put its case forward at an “oral hearing”, says the Commission. If the vendor is unable to provide sufficient evidence to back up its case and regulatory body judges it to be in “abuse” of the EC Treaty, S&P will have these pricing practices banned and may face a fine.
A statement of objections is a formal step in EC antitrust investigations in which the Commission informs the parties concerned of the objections raised against them. The parties can reply to the allegations, setting out all facts relevant to their defence against the objections raised by the Commission and may request an oral hearing to present its comments on the case.
Although the 12 digit ISINs have been under investigation, S&P’s own nine character proprietary Cusip codes have not been subject to the same level of scrutiny. This is likely because ISINs are indispensable for a number of operations that financial institutions carry out, such as reporting to authorities or for clearing and settlement purposes, and cannot be substituted by other identifiers for securities. Users are therefore locked in to using these formats and, as a result, paying for them.
However, S&P is not the only vendor facing scrutiny with regards to instrument identifiers from the Commission, it has also opened formal anti-trust proceedings against Thomson Reuters concerning a potential infringement of the same EC Treaty’s rules by virtue of the vendor’s Reuters Instrument Code (RIC) symbology.
The Commission says it will investigate Thomson Reuters’ practices in the area of real-time market data feeds, and in particular whether customers or competitors are prevented from mapping RICs to other data feed suppliers’ symbologies. The Commission says: “Without the possibility of such mapping, customers may potentially be ‘locked’ in to working with Thomson Reuters because replacing RICs by reconfiguring or by rewriting their software applications can be a long and costly procedure.”
Given these regulatory investigations into its data rivals, it is no wonder that Bloomberg has felt compelled to offer its proprietary codes to the market for free. The data vendor has indicated that it will be providing its own proprietary financial instrument codes to the market at no charge to users via a new website and under the banner of its new initiative: Bloomberg Open Symbology.