What it is:
CUSIP stands for "Committee on Uniform Securities Identification Procedures" and refers to a 9-digit alphanumeric code assigned to all security issues approved for trading in the United States and Canada.
How it works (Example):
The American Bankers Association initially developed the CUSIP system in 1967. The following year, Standard & Poor's won a competitive bid to operate and maintain the CUSIP Service Bureau, which issues CUSIP numbers.
Securities issuers enter into a license agreement with Standard & Poor's in order to receive CUSIP assignments. CUSIP numbers are permanent and appear on the face of a security's certificate.
The first six characters of a CUSIP are the issuer's unique identification code. The seventh and eighth digits differentiate between fixed-income, equity, or other security classes. The ninth number is a check digit that is sometimes ignored or truncated. For example, the CUSIP for the common stock of International Business Machines Corp. (NYSE: IBM) is 459200-10-1.
Options and futures contracts do not receive CUSIPs, but nearly every other type of security does, including: publicly traded stocks and bonds, government securities, American Depository Receipts, municipal debt, mutual funds, index options, rights, warrants, certificates of deposit, CLIPS, mortgage-backed securities, commercial paper, private-placement securities, bankers' acceptances, Treasury futures, syndicated loans, and public limited partnerships.
In addition to assigning CUSIPs, the CUSIP Services Bureau determines whether a security is eligible for a CUSIP and establishes CUSIP rules and protocol. It also maintains a database of information on each unique CUSIP security.
Issuers outside the United States and Canada do not use CUSIPs; they typically use a nine-character CINS (CUSIP International Numbering System) or a 12-character ISIN (International Securities Identification Number and 70% of securities worldwide are labeled by either CUSIPs or ISINs.
Why it Matters:
By acting as a unique identifier for each security, CUSIPs help market participants avoid confusion and ensure that securities transactions are correctly matched and settled. Additionally, they are also needed to ensure that dividends, interest, and other payments are properly applied.