WASHINGTON - The Municipal Securities Rulemaking Board is proposing that most municipal bond issues be required to obtain Cusip numbers - a move that could help ease the market into shorter settlement cycles but stymie some small dealers who want to keep certain deals under wraps.
The MSRB also warned that it may begin reporting to enforcement agencies the names of firms that fail to obtain Cusip numbers required by board rules.
The board has been carefully monitoring the use of Cusip numbers on new issues since July 1, 1990, when it began requiring dealers to send official statements to the board, according to a notice appearing in MSRB Reports.
The MSRB has discovered that official statements for "several hundred" new issues are sent to the board each year without Cusip numbers, and many of those do not qualify for exemptions, the notice said.
"There will be those who claim they forgot" to get their Cusip numbers, said Christopher Taylor, the MSRB's executive director. "The reasons for not getting them range from not knowing, not caring, or not wanting to pay the money, to the other extreme of not wanting anyone to know the deal exists." He said the major reason some firms fail to seek Cusip numbers is confusion over what deals are actually exempt.
Whatever the reason, the board warned in its three-page notice that it may begin cracking down.
"Underwriters failing to obtain Cusip numbers as required by [board rules] may have official statements returned by the board, and the board may in the future report these apparent violations to the appropriate enforcement agencies," the MSRB's notice says.
Currently, when an issuer goes to market, the underwriting firm handling the deal applies to the Committee on Uniform Securities Identification Procedures for an identification number for the offering. Rights to the Cusip numbering system are owned by the American Bankers Association, and the system is operated by a bureau of Standard and Poor's Corp.
The system plays a critical role in the day-to-day operation of the market because the numbering is used widely for trading, record keeping, clearance and settlement, call processing, customer account transfers, and safekeeping, the board said. Such numbering is increasingly important with the growing use of automation and the efforts of the so-called Group of 30 to streamline clearance and settlement procedures worldwide, the board said.
Currently, the Cusip Service Bureau assigns Cusip numbers to all municipal deals with par value of $500,000 or more or those with par value of $250,000 or more by issuers with outstanding debt exceeding $250,000. Numbers also are assigned to deals done by issuers with more than $500,000 in outstanding debt and a Cusip subscriber documents the need for a number.
The MSRB said some dealers are mistakenly not applying for Cusip numbers for short-term issues, for private placements of notes, and for issues that are in the underwriter's safekeeping. the board put the market on notice that dealers who serve as underwriters, placement agents and financial advisers for such issues must seek numbers.
Moreover, the board said it will ask the Cusip board of trustees and the Cusip service bureau to expand the current system by dropping any exemptions for deals under the respective $250,000 and $500,000 par values. "The board believes that these smaller issues should be eligible for Cusip number assignment" and plans to "communicate this view to the Cusip board of trustees," the MSRB notice says
The board said some firms may argue that some smaller, short-term. or privately placed issues do not need Cusip numbers because they are not expected to trade in the secondary market. But the board said its view "at this time is that there should be no exceptions ... regardless of the maturity, date of the securities. the method of sale, or extent of distribution."
"It's the linchpin for better secondary market disclosure," said David Thompson, president of Griffin, Kubik. Stephens & Thompson in Chicago, referring to the use of Cusip numbers. "If we can't find out what we have, the system is stymied. The Cusip number is such a fundamental building block of the process." If not required by regulation or law, "it's required by common sense," he said.
The board noted that certain specialized types of municipal bonds should remain ineligible for Cusip numbers, including certain issues of "local improvement district" bonds. Tax-exempt commercial paper also is ineligible for Cusip numbers, but the Cusip Service Bureau and Depository Trust Co. are considering making it depository eligible, which would require Cusip numbering, the board said.