Cutting through the hype surrounding the FDTA rulemaking process

Depending on who you speak with, it may seem like the Financial Data Transparency Act (FDTA) is the biggest thing to happen to the world of financial data reporting since the advent of the spreadsheet. While it is an important piece of legislation designed to modernize the collection and dissemination of financial data by and between federal financial regulators, the FDTA has also fallen victim to a great deal of hype and misinformation about its purpose.

The law, enacted in December of 2022, is currently in the hands of a joint rulemaking group consisting of eight Financial Stability Oversight Council (FSOC) agencies, including the Securities and Exchange Commission (SEC), the Treasury Department, the Commodity Futures Trading Commission (CFTC) and others. Originally scheduled to be issued in June, the joint proposed rule has been delayed. In the meantime, speculation continues to grow over what exactly the FDTA will mean for companies that need to report financial data to federal agencies.

In an effort to demystify the FDTA for those participating in the US capital markets concerned about its potential impact on operational workflows, I offer the following interpretation of the Congressional intent of the law, a review of potential pitfalls to look out for, and a reassurance that, whatever the forthcoming draft says, existing reference data standards will be fit for purpose.

What the FDTA is (and what it is not)

The FDTA is designed to make the financial data disseminated by and between federal regulators more accessible, more uniform, and more useful to investors and consumers. It is focused exclusively on the information being reported to and shared between the Treasury Department, eight key regulators, and the public. At its core, the FDTA is designed to replace archaic processes like faxing and scanning printed pages into giant PDF files when municipalities report bond issuance data to federal regulators or when trade settlement records are shared between the Treasury Department and the SEC. By moving these manual, labor-intensive methods of data sharing onto a standardized, machine-readable data sharing framework, like eXtensible Business Reporting Language (XBRL), the FDTA will allow information to flow more efficiently.

Indeed, the language of law itself is crystal clear in its intent to modernize data sharing between government agencies. However, a single reference buried in the 15 pages of text devoted to the FDTA within the 1,772-page National Defense Authorization Act has led to speculation about how the FDTA could potentially affect the way financial firms and other regulated entities report data to federal regulators. It is a call to adopt a common, non-proprietary entity identifier for the purpose of standardizing and streamlining the relevant information being shared.

While this single reference is clearly limited to entity identifiers, some commentators have seized on a broader interpretation to include existing standards for securities identifiers, namely the Cusip and Figi, also known as the Financial Instrument Global Identifier. The theory is that FDTA will mandate a conversion to, and over-reliance on, Figi, which has been marketed as “free and open”. This is misleading for several reasons.

Do no harm

Firstly, we must not conflate the structure, function and role of entity identifiers with those of securities identifiers.

Securities identifiers are used by financial firms, clearinghouses, settlement and netting services, investors and other US capital market participants to uniquely identify financial instruments, such as stocks, bonds, US Treasuries, mortgage-backed securities, and several other asset classes. Accordingly, securities identifiers serve a different set of market needs and their design and usage support dramatically different use cases than those of entity identifiers.

Secondly, regulators have their plates full with addressing the broad swath of changes that need to be made before government agencies can even convert PDF financial statements into machine-readable formats. Upending the entire reference data infrastructure of the US financial markets in the process would be a costly and unfortunate distraction.

Thirdly, it is important to note that the Cusip identifier is currently the only standard North American securities identifier that is universally accessible, machine-readable, fungible, and universally used throughout the financial services industry. Any forced change to securities identifier usage requirements would disrupt US capital markets by creating a recipe for trade settlement failures, reporting inconsistencies and confusion among market participants.

At the core of this issue is the technical, but critical, concept of fungibility. Simply put, fungibility means that a single security should be represented by the same identifier regardless of the exchange where the shares were purchased. For example, the Cusip for Microsoft common stock—594918104—is consistent regardless of venue of execution. With the Figi, by contrast, there is a different identifier for each exchange where Microsoft common stock is traded—a list of now more than 200 and growing.

In fact, the introduction of Figi has already started to create confusion in the handful of examples where the Figi has been included in SEC Form 13F filings, which are used by asset managers to report their securities holdings to the SEC. In cases where asset managers have included the optional Figi, we have found many cases where the wrong Figi is used, the digits are transposed, or even another identifier, such as the Isin, is listed in the Figi field. That means these so-called “free” and “open” Figi identifiers would need to be accompanied by expensive data mapping and reference data fields if they were to be used in a real-world setting with any degree of accuracy.

Building on that shaky foundation would not achieve the stated intent of the FDTA of streamlining financial data reporting. Quite the opposite, it would create chaos.

Ready for anything

The House Appropriations Committee acknowledged the importance of not doing anything to disrupt financial markets in its guidance to the SEC on the FDTA, writing: “The Committee recognizes that the Financial Data Transparency Act (FDTA) contains no reference to securities-level identifiers. The Committee expects the SEC, in its joint rulemaking, to implement the FDTA consistent with Congressional intent and avoid disrupting the U.S. capital markets.”

With this, the committee has made it clear that it recognizes the potential risks to capital markets of an FDTA overreach, and that the law’s intent was never to change the way financial firms use reference data.

However, even if the draft standard does introduce new requirements for financial firms reporting data to federal agencies, market participants can rest assured that the Cusip system will adapt—as it has for the last 56 years—to make the transition a smooth one. Whenever there has been a need to modernize the Cusip system to confront new challenges in the marketplace, whether it was delivering counterparty credit risk data following the 2008 Financial Crisis, adding a free Isin look-up service to improve global market transparency or the work streamlining the SEC 13F filing process, the administrators of Cusip have consistently done whatever it takes to ensure efficient operation of financial markets and will continue to do so.

Scott Preiss is the senior vice president and global head of Cusip Global Services, a subsidiary of FactSet, which operates the Cusip numbering system on behalf of the American Bankers Association.