FactSet ended its year with a bang—for its buck, that is. On December 27, the financial data provider announced that it would acquire Cusip Global Services (CGS), the operator of the Cusip reference data standard, for $1.925 billion. Once the deal is finalized, which is expected this quarter, FactSet will become the second entity to operate the Cusip system on behalf of the American Bankers Association (ABA), the standard’s founder and owner, in more than 50 years.

Last year, the European Commission (EC) stipulated that S&P Global Market Intelligence, which the ABA chose to operate the Cusip system in 1968, must divest CGS as a condition of its ongoing merger with IHS Markit. At the time, some industry observers who work with Cusip numbers were hopeful that new ownership could lead to reduced costs and fees for those who have spent millions over the years to use and license them.

While change is constant, it often breeds worry, and some market participants are now anxious that the fees they already pay may rise, or that they’ll face vendor lock-in should FactSet create new data bundles or products using combinations of proprietary and Cusip content.

“I’m perplexed as to why they announced the deal right at the end of the year. Companies typically don’t do that unless they’re looking to bury it so people don’t notice it,” says a tier-one bank executive whose employer spends more than $1 million in fees on Cusip’s data. “I just—to be honest—don’t trust the whole thing. They need to let their actions speak louder than their words and show the industry that they’re going to maintain it but do so in a way that doesn’t cause any concern or anxiety.”

A new day

In North American securities markets, particularly in the US, the nine-digit Cusip is the most widely used securities identifier of its kind. It acts as a kind of serial number for US and Canadian stocks, bonds, mutual funds and exchange-traded funds (ETFs), and underpins various functions across the front, middle, and back offices, from stock identification to trade reporting and settlement.

Its 12-digit counterpart serving the rest of the world—the International Securities Identification Number (Isin)—is owned by the International Organization for Standardization (ISO) but operated by more than 120 national number agencies, which are responsible for Isin assignments in their respective countries. In the US, CGS is responsible for assigning US Isins in addition to Cusips. In total, CGS manages a database of 60 different data elements uniquely identifying more than 50 million financial instruments.

It’s interesting since FactSet, while acquisitive and well regarded, would scoop this up. It certainly is a cash cow, and the $175 million in revenue is probably 80% profit. I’ve known Scott [Preiss] over 30 years, and he has always been a big proponent of protecting their proprietary content. I’m interested to see how it all shakes out.

Consultant

Though the Cusip system has always been operated by a private entity, it has become a de facto industry utility over time. It’s been crucial that it be perceived as independent of—and separate from—its operator, sources say. In an investor call held by FactSet on January 5, CEO Philip Snow said CGS will continue to maintain the same autonomy it enjoyed at S&P, while continuing to work closely with the ABA. Snow added that this autonomy will include keeping separate sales forces and solutions for CGS and FactSet, as well as keeping CGS products managed exclusively by the CGS product team. The entire CGS staff, which includes roughly 100 sales and operations members, were offered the opportunity to stay on with the company, Snow said.

However, market participants are skeptical about whether those statements will hold true. In the same call, Snow said CGS will become part of FactSet’s Content and Technology Solutions (CTS) business and will serve the purpose of advancing the company’s broader “open-data strategy.” While still headed by Scott Preiss, CGS and staff will now report to head of CTS Jonathan Reeve, who formerly worked at S&P Global in various roles for more than 10 years. The acquisition, which represents FactSet’s largest buy to date, is projected to increase CTS’s annual subscription value to more than $425 million.

A senior executive at a data company envisions additional datasets being added to CGS’s suite of products beyond simple identifiers, such as green bond data in an ESG play, and offering monetary incentives, such as reduced fees, for customer buy-in. Such a move would, technically, be consistent with keeping CGS and FactSet separate; CGS would just offer customers more.

“You don’t spend $2 billion on a firm that generates 15% [of its revenue] on issuance and 85% on licensing fees to provide ‘open data,’” the senior executive says.

Indeed, as it was for S&P, CGS will be a cash cow for FactSet. On the licensing side, an end-user using Cusip numbers of more than 40,000 securities throughout four or more business lines in three or more regions, would potentially incur $477,750 in fees, annually, according to a calculator on CGS’s website. The vast majority goes back to CGS, while the ABA collects a royalty on each contract inked.

It’s unclear what FactSet’s open-data strategy entails, though it may include the Open:FactSet Marketplace, a catalog of more than 200 proprietary and third-party datafeeds, APIs, and investment solutions that it launched in 2018.

“I’m shocked that it was FactSet [that acquired Cusip]. What happens if the US regulators shut off the licensing pipeline? What if the Financial Transparency Act (FTA) becomes law?” the senior executive adds.

The FTA was passed by the US House of Representatives in October 2021 and would mandate the adoption of a common, non-proprietary legal entity identifier (LEI) for regulated organizations and would do away with licensing schemes.

“What this does do is wipe away any hint of CGS being a utility or even a market good that it enjoyed through the 1980s into the 2000s. Cusip was just there and part of the woven fabric of the market, and a vast majority never even knew about S&P’s role—and even less about the ABA role. For 50 years it was simply how things were done,” the senior executive says. “With a vendor buying it and the market knowing it paid $2 billion for it, the idea they can justify the licenses with added datasets should be challenged by every firm CGS works with.”

The aforementioned bank executive agrees, saying they wish the firm would have been acquired by an industry group, independent consortium, or a non-profit like the ABA itself. They, too, anticipate expanded offerings from CGS with the help of FactSet solutions and technology, which would also be in FactSet’s interest to try and recoup the huge purchase price.

The way forward

On the investor call, FactSet CFO Linda Huber said FactSet secured $2 billion in committed financing from PNC Bank and Bank of America, and is also considering a potential $1 billion bond issuance to replace some of the initial bank financing. FactSet and CGS declined to comment further at this time, citing that the deal is ongoing.

Philip Miller, co-CEO and co-founder of Solidatus, a data lineage and visualization platform, called the announcement “stunning.”

Due to Cusip’s ubiquity and longevity, Miller says, users often don’t realize the total cost of ownership (TCO) involved in using Cusip numbers—until they change, and that change is then replicated across their organizations.

“I can tell you for a fact, if I were to look at how the legal entity identifier came into being and how that was born as the CICI—the Commodity Futures Trading Commission’s interim counterparty identifier—and how much that cost the Dodd–Frank implementations of every bank, it’s eye-watering to have these standards changing,” Miller says. “If Cusip were to change, you would have historic reporting problems. You would have to have look-up tables that existed forever and ever and ever.”

Of course, there’s a flip side to that, Miller says. Many users also want Cusip to change for reasons from its fee and licensing structures to its private ownership. “The academic [viewpoint] vs. the practical and operational are two very different things,” he says.

A consultant who works on a bank client’s relationship with CGS says it’s entirely possible that CGS’s operations, and thereby its much-maligned fee structure, remains unchanged, and that in practice, it functions the same as it always has—particularly once closing conditions and regulatory approvals are sorted.

“It’s interesting since FactSet, while acquisitive and well regarded, would scoop this up. It certainly is a cash cow, and the $175 million in revenue is probably 80% profit,” they say. “I’ve known Scott [Priess] over 30 years, and he has always been a big proponent of protecting their proprietary content. I’m interested to see how it all shakes out.”