Industry groups seeking to establish a unique industry identifier (UII) for multi-listed securities that are traded cross-border have agreed to addresss calls for clarification from a German user group. The move appears to answer concerns raised by Dessug, the German Swift Securities User Group, which requested that a simpler vocabulary and an updated glossary of terms be considered in discussions on the use of International Security Identification Numbers (ISIN) in the UII initiative.
Confusion over the use of ISINs for multi-listed stocks has centred on the distinction between ‘official place of listing’ (OPOL) and ‘place of trade’ for certain securities. By establishing a unique identifier, it is hoped that counterparties to cross-border trades will suffer fewer failed trades because of misidentification of securities.
“We are absolutely moving forward with making the language clearer – that process is underway,” says a spokesperson for the Financial Information Services Division (FISD) of the Software & Information Industry Association.
FISD has been leading the debate on establishing identifiers for internationally traded securities, through the Reference Data Coalition (Redac) and along with the Reference Data User Group (RDUG).
“We are in the process of incorporating some of the clarifications into the core UII – including the creation of a formal glossary of terms used in describing the criteria for UII as well as the addition of more examples.”
The German user group’s concerns came in response to a white paper issued by RDUG/Redac late last year. In a response paper authored by Dessug member Bernd Matchke, the group made several points based on members’ understanding of the unique instrument identification problem.
The core point of confusion concerned the difference between ‘place of trade’ and ‘place of listing’ for securities. The Dessug paper said: “It is the understanding of the Dessug that a security needs to be ‘listed at’ an exchange in order to be able to be ‘traded at’ that exchange.” The paper goes onto say, “From our point of view, ALL (sic) ‘place of trade’ are also ‘place of listing’.”
To address the German group’s questions, FISD hosted a conference call with RDUG and Redac members last month. It also issued a response paper of its own. According to Richard Robinson, co-chair of the unique security IP group at FISD, “…as a result of the discussion with Dessug in December … I am not aware of any other concerns the group has.”
Robinson said, “There were some semantical issues, as well as point-of-view (local versus global), on problem definition. But, overall, the Dessug group, in my impression, came away from the conversation in agreement with Redac’s and RDUG’s viewpoint.”
Officials at Dessug did not return calls for comment by press time. But according to the FISD, Dessug had misunderstood the distinction between ‘traded at’ and ‘listed at.’
“The core point is that ‘place of listing’ is an aspect of the security and associated with the legal and regulatory processes undertaken to list a security, says the FISD spokesperson. “ ‘Place of trade’ is an aspect of trading conditions and relates to issues of liquidity associated with (some) pricing decisions and intra-day arbitrage opportunities.”
It was this confusion that sparked a list of concerns from Dessug, according to Robinson. Basically, the use of ISIN concerns only official places of listing for multi-listed, cross border traded stocks. No matter where a stock is traded, only one ISIN or OPOL can exist per marketplace. For example, if a stock is listed on the New York Stock Exchange, but traded on the regional Boston Stock Exchange, the official listing will remain the NYSE.
Codes at the places of trade, (such as the example above at the BSE), remain unaffected by the ISIN discussion, whether they be Sedol, RIC, Bloomberg or any other local code, said Robinson. Local issues concerning the security, such as instrument safekeeping or trading, “is a settlement issue”, he said. “The OPOL is a global issue and concerns the security itself”.
Dessug also was concerned that the ISIN discussions should result in a cost-effective solution that furthers STP and does not require major enhancements to existing systems.
Robinson argued that the Dessug “may be somewhat unrealistic” concerning cost. “New situations and products many times require new systems and processes that dovetail with current processes,” he added.
The German user group argued that the ISIN problem should not be seen as a major priority because multi-listed securities account for only 5% of global trading. They argued that finding a solution for multi-listed securities should not overburden or affect the other 95% of the market.
However, Robinson argued that multi-listed stocks “are not small, low trade volume issues. They are the large corporations with the highest volume of trade activity. In this regard, they represent a much larger percentage of activity than would be inferred by only looking at percentage of securities that exist.”
Dessug also expressed concern with the London Stock Exchange’s Sedol system. In the closing remarks of its paper, Dessug wrote: “One major problem appears to be the Sedol in the U.K.”
Robinson said that this remark was due to the Dessug’s misunderstanding of what the LSE is doing with Sedol. “The LSE was running out of numbers anyway, so they had to move to an alphanumeric system,” he said. The LSE is in discussions with the FISD groups and the Association of National Numbering Agencies (ANNA) concerning Sedol and the ISIN issue, he added.
“Standardisation is not possible,” said Robinson, “what is, is the methodology – knowing what numbers to apply to the security at each level.”
Once the distinctions between issuer, issue, place of listing and place of trade are understood – the core question relates to how these distinctions will affect systems, processes and applications (including investment decisions, portfolio valuation and rebalancing, risk management, trading, mid-office processing, back-office and settlement processing, foreign exchange, corporate action processing, accounting and regulatory reporting), says an FISD spokesperson.