The benefits of CUSIP non-permanence: Reverse splits

Abstract

The unique identification of securities is the basic building block of financial markets. It is impossible to trust anything else about a security without first knowing what is being bought and who is selling it. Security identifiers provide that critical function almost invisibly, allowing trades to be executed, cleared, settled and tracked in a standardised, consistent manner across the countless individual portfolios and security master files that make up the global financial system. This concept is so fundamental and critical to the efficient operation of our financial markets that it is often taken for granted. Two recent trends, however, have forced a closer look at the underlying governance structure of security identifiers as a potential source of trade settlement failure and confusion among market participants. The rise in popularity of reverse stock splits and the introduction of alternative securities identifiers that use a different approach to cataloguing these types of corporate actions has created a scenario in which market participants using different securities identification taxonomies will see the same underlying security two different ways. The phenomenon puts a spotlight on the issue of securities identifier permanence and raises serious questions about when an identifier needs to change to address corporate actions. This paper argues that the approach utilised in the governance of the Committee on Uniform Securities Identification Procedures (CUSIP) and International Security Identification Number (ISIN) identifiers, whereby identifiers change in response to corporate actions, is critical to the maintenance of efficient financial markets.