Why is it so hard to access performance and financial data in munis?

Issuers look to the municipal bond market to refresh our nation’s infrastructure, but who will update the municipal bond market’s obsolete data infrastructure? Almost 20 years into the new century, the functional systems for identifying issuers and their performance are still being served up with 20^th century technologies. To move the market forward, we believe that market participants, including regulators, adopt the best of breed technologies from other markets. The first step forward is to build a consortium of private, nonprofit, and academic interests who have been promoting alternative systems for identifying, indexing and analyzing capital market data.

The “who’s who” is important
Associating securities with standard issuer identifiers makes it easier for investors to track exactly who owes what. In the municipal market, we often rely on the first six positions of the CUSIP number to identify issuers — but this 1960s-vintage technology is no longer fit for purpose.

CUSIPs have a total of nine positions, but the last position is a so-called check digit used to verify that there are eight characters do not contain a typo. So, for any given issuer, only the seventh and eighth positions can be used to uniquely identify a given bond. Since those positions can be filled with either letters or numbers, there is a theoretical maximum of 36*36=1296 CUSIPs per issuer (but the actual limit is lower due to other conventions in the CUSIP system). Since municipal bond issues often contain a dozen or more serial bonds and since CUSIPs are not reused after maturity, bigger issuers can easily exceed this limit.

Moody’s associates 29 CUSIP6 identifiers with the State of California and 42 CUSIP6’s with the Dormitory Authority of the State of New York (DASNY). And, as is the case with other conduit issuers, DASNY CUSIPs tell us nothing about a bond’s actual obligor, who is ultimately responsible for servicing the bond.

Finally, CUSIPs are not freely redistributable — that is, they cannot be shared for use by others without a license. This further compromises the ability to use them to exchange or provide access to data. For all intents and purposes, the municipal market lacks a standard issuer identifier.

Lack of free redistribution also limits the CUSIP9’s usefulness as a security identifier. For example, while MSRB is allowed to display these IDs on EMMA, the board has had to take steps to inhibit copying and pasting them. Licensees of bulk EMMA data also require costly licenses from the CUSIP Service Bureau. No such restriction exists for equity tickers — one reason why stock market data is so easily retrieved.

Bloomberg has been promoting a free alternative to CUSIPs called the Open Financial Instrument Global Identifier (or OpenFIGI for short). This standard is owned by the nonprofit Object Management Group, but Bloomberg has done the necessary work to apply OpenFIGI to the municipal bond market. It should thus be relatively easy for MSRB to display OpenFIGI IDs concurrently with CUSIPs before ultimately transitioning.

In other markets, the Legal Entity Identifier (LEI) provides an alternative way to identify issuers. LEIs are maintained by a nonprofit — the Global Legal Entity Identifier Foundation — which does not levy redistribution fees. GLEIF’s database also supports associations of LEIs to direct and ultimate parents. So, if LEIs were implemented in the municipal bond market, component units and enterprise funds that separately issue bonds could be readily linked to the relevant primary government.

Right now, only a few hundred U.S. state and local governments and nonprofits have LEIs. Many issuers — especially smaller ones — are unaware of the LEI standard or may not see the benefit of taking the time to register for one. But it may be possible for an oversight body like MSRB to assign LEIs on behalf of issuers. When an issuer’s representative uploads primary or continuing disclosure to EMMA, he or she could be given the option of authorizing an LEI registration or renewal — allowing MSRB or a designated service provider to actually do the paperwork. To be maximally useful, a marketwide universe of LEIs could be mapped — where possible — to Census Codes, Employer Identification Numbers and entity codes assigned by state governments.

Why is it so hard to access performance and financial data?
Today, the basic information on issuer performance, such as revenues, expenditures and debt levels, is locked inside voluminous PDFs — which are little more than pictures of paper reports. These data points are manually extracted by data aggregators for a fee and by nonprofits to the extent that their donor support allows. But this kind of information, which speaks to whether an issuer can repay its obligations, should be more readily accessible in a 21^st century financial market. In U.S. corporate securities markets, these data points enter the ecosystem in structured form through XBRL 10-K and 10-Q disclosures.

The municipal market can also embrace XBRL financial disclosures as Will County, Illinois, has recently demonstrated. While some at MMA and GFOA might argue that the municipal market’s unique characteristics somehow exempt it from 21^st century financial disclosure protocols, Barnet Sherman did an excellent job of replying to this objection in a 2018 commentary over at Forbes.com.

Will County’s demonstration is, in turn, based on a demonstration reporting taxonomy developed by a team of professionals from academia, for-profit and not-for-profit organizations. It took a village to create these initial offerings and it will take a bigger village to produce comprehensive, production-ready reporting tools.

While some may have imagined that a single Silicon Valley startup could drag our market kicking and screaming into the 21^st century, the recent closure of Neighborly shows that that ambition was naive. Instead, regulators will have to partner with companies, academics and policy wonks to rebuild the municipal market’s creaky infrastructure. Implementing LEIs, open symbology and XBRL financial statements would be useful first steps in this enterprise.