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S&P Under Investigation by European Commission for Pricing of ISINs

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All eyes will be on the European Commission as it investigates Standard & Poor’s pricing practices concerning International Securities Identification Numbers (ISINs). The EC launched its inquiry this month, and many will see the outcome as a precedent for numbering agencies’ future ability to charge consumers and redistributors for the identification codes it administers.

The Commission believes that S&P may be abusing its monopoly position as the US national numbering agency, by forcing European financial institutions to pay licensing fees for the use of US ISIN codes in their own databases. The vendor has been charging these European firms for this service since 2003. Specifically, the Commission believes this practice may be in breach of Article 82 of the EC Treaty’s rules on abuse of a dominant market position.

An S&P spokesperson confirms that the investigation relates to Cusip Service Bureau’s (CSB) ISINs rather than S&P’s own Cusips numbering system. S&P runs the CSB on behalf of the American Bankers Association (ABA). Although the 12 digit ISINs are under investigation, S&P’s nine character Cusip codes are not under the same scrutiny, according to the spokesperson.

While describing the original complaint that prompted the EC’s inquiry as “without merit,” S&P further asserts that the complaint “misrepresents the activities of the CSB and ignores the fact that CSB’s licensing practices and charges are wholly transparent, in line with industry practices, and based on fair, reasonable and non-discriminatory terms”.

The S&P spokesperson says: “We are cooperating with the European’s Commission’s inquiry and look forward to explaining CSB’s role and business practices.”

As part of its investigation, announced on 12 January, the Commission is therefore examining the license fees for the use of ISINs, as well as certain descriptive elements attached to them, each time a code is used to access information provided by data services providers like Bloomberg and Thomson Reuters. Annual license fee costs for a typical asset management operation run out to US$25,000-US$30,000 on average.

These practices could also involve financial institutions being forced to pay for services they do not need, in the form of the ISIN database, which the Commission describes 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.

In 2004, a dispute broke out between the International Standards Organisation (ISO), members of the Association of National Numbering Agencies (ANNA) and CSB on the issue of charging for ISIN codes. The London-based Information Providers User Group (IPUG) also contributed to the debate with a letter to the Securities and Exchange Commission (SEC), urging that fees based on any claims of intellectual property by national numbering agencies be waived.

As a result of these complaints, in 2005, S&P took steps to address concerns over its pricing policies for Cusip instrument identifiers by restructuring its pricing and providing some level of transparency. The new pricing policy provided increased flexibility for European clients, some of whom raised objections to the charges for identifiers relating to US-centric asset classes that are of limited use to them. In particular it aims to address their concern that usage of CSB identifiers for specific asset classes such as municipal and mortgage-backed data was minimal or unnecessary.

European users with a limited number of securities were therefore enabled to select from a tiered fee schedule. This meant that users wishing to database Cusip-based identifiers for up to 10,000 securities, albeit a relatively small universe, had a clear pricing guide to follow.

However, concerns were raised again in June 2007 by German investment and asset management association, Bundesverband Investment & Asset Management (BVI), which wrote to the Commission’s clearing and settlement advisory and monitoring expert group complaining about CSB’s fee practices. BVI stated that it felt European firms should not be charged for the storage and redistribution of ISINs or the reference data attached to these codes.

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