ISO 10962

CFI : Classification of Financial Instruments

The CFI code has been developed to address a number of problems which have concerned the financial community on the past years. Among others the following problems have affected the financial community:

· lack of consistent and uniform approach to grouping financial instruments

· use of similar terminology for instruments having significantly different features in the different countries

· inability to group securities in a consistent manner leading to reports of holdings being categorized differently.

The benefits of the new code are:

· Definition and description for an internationally valid system to classify financial instruments

· provision of a set of codes to be used by all market participants in an EDP environment and permission of electronic communication between participants

· improved understanding of the characteristics of financial instruments will lead to a better understanding by investors.

The structure of the CFI code:

The CFI reflects characteristics that are defined when a financial instrument is issued and remain unchanged during its entire lifetime.

The CFI consists of six alphabetical characters:

The first character indicates the highest level of classification (categories).

Categories:

Equities (E)
Debt instruments (D)
Entitlements (Rights) (R)
Options (O)
Futures (F)
Others/Miscellaneous (M)

The second character indicates specific groups within each category:

Groups e.g. for equities:

Shares
Preferred shares
Convertible preferred shares
Units, i.e. unit trusts/mutual funds etc.
Others

The third to sixth character indicate the most important attributes to each group:

Attributes e.g. for equities:

Voting right
Ownership/transfer restrictions
Payment status
Form

Report on CFI developments

According to the 1997 annual report, the ISO-TC68/SC4/WG2 was reconvened on April 21 and 22 1998 in order to discuss the proposed amendments.

Finally the following amendments to ISO-10962found a general agreement:
1.1. New Equity Groups
- preference shares

- preferred convertible shares

- preference convertible shares

 

1.2. New Equity attributes for preference shares:
The attibute "ownership" will be replaced by "redemption" since the redemption features are more important for pref.shs:

Redemption:

- redeemable
- extendible
- redeemable/extendible

1.3. New debt attributes:
Under the attribute redemption the following values have to be added:
- fixed maturity with put
- fixed maturity with put and call
- amortization plan with put
- amortization plan with put and call

1.4. New group for the category "entitlements":
- purchase rights

1.5. New attributes for the group "Rights":
First Attribute "underlying assets":
- ord.shares
- pref.shares
- bonds
- others

A revised version of ISO 10962 has been voted positively by ISO members.

 

Status of CFI allocation

Guidelines for the allocation of the CFI-Code, April 1997

1. General classification procedure as described in the standard
In principle, the CFI code reflects characteristics that are defined when a financial instrument is issued and that remain unchanged during its entire lifetime. However, a few events that may lead to a new CFI code for the same instrument are anticipated, such as the changing of voting rights or ownership restrictions by a stockholders' meeting. A special section of these guidelines lists such events.

The sequence of categories and groups given in ISO standard 10962 (4. Codes and Definitions") supports the classification of ambiguous instruments. A financial instrument, for which the definition of several categories or groups is correct, should be classified under the first possible category or group. (1st = E-Equities, 2nd = D-Debt, 3rd = R-Entitlements, 4th = 0-Options, 5th F-Futures, 6th = M-Others).

2. Common units of limited partnerships
Common units of limited partnerships companies are classified as "Equities", group "Shares".

3. Preferred shares
Convertible preferred shares are classified as "Equities", group "Convertible shares" and not as "Preferred shares".
Saving shares and preference shares (assimilable to preferred shares but junior in claims) have to be classified under the category "Equities" group "Preferred shares".

4. Investment trusts, SICAF, SICAV, FNMAE, GNMAE
Units issued by investment funds that are constituted as companies (e.g. investment trusts, SICAV, SICAF etc.) are classified under "Equities", group "Shares".
Units issued by entities named "funds" that in reality were created for financing purposes ("Securitization") and not for collective investment such as Foods communs de créances, collateralized mortgage obligations, etc. should be classified as "Debt instruments" and not as category "Equities".

5. Other Equities
Shares/units of associations, cooperative societies, mutual benefit associations, participation certificates, dividend-right certificates are classified under the category "Equity", group "Other".

6. Mixed units/combined instruments:
Instruments consisting of
- share(s) or unit(s) and bond(s) and warrant(s),
- share(s) or unit(s) and bond(s),
- share(s) or unit(s) and warrant(s), are classified under the category "Equity", group Other".

Whereas mixed units consisting of shares and debt instruments are classified under the category "Equities", group "Other" and bonds with warrants attached build their own group within the category "Debt instruments", mixed units consisting of
- a number of debt instruments and
- debt instrument(s) and other (e.g. insurance policies)
are classified under the category "Debt Instruments", group "Other".

7. Bonds with warrants attached/Bonds ex warrants
Bonds that were originally issued as bonds with warrants but that have been separated from the warrants are classified as "Debt instruments", group "Bonds".

8. Convertible bonds with warrants attached/Convertible bonds ex warrants
Convertible bonds that are issued with warrants attached are classified as category "Debt instruments", group "Bonds with warrants". When the warrants are detached, the convertible bonds ex warrants are classified as category "Debt instruments", group Convertible bonds".

9. Hybrid instruments, innovative financial instruments
For GROIs, CLOUs, IGLUs and other innovative instruments, guideline 1 is applicable.

10. Medium Term Notes Programs
All notes (tranches) of a medium term note program, under which individual notes may be issued with a lifetime of one to 30 years, are classified as medium term notes, including the shorter-term notes (one year or less). Medium term notes (MTN's) cum warrant and convertible MTN's should be classified as D=Debt,T=Medium Term Notes. The standard does not provide any special classification in such cases.

11. Money market instruments
Money market instruments are classified strictly according to their duration. Debt instruments with a duration of more than 12 months are classified as bonds.

12. ECP-Programs (Euro-Commercial paper programs)
Euro-commercial paper issues are not considered as medium-term notes programs and are strictly classified according to the length of their lifetime.

13. Variable interest
Debt instruments that have a variable interest rate during a certain period and then bear a fixed interest rate until maturity are classified as debt instruments with variable interest (category "Debt instruments", different groups possible).
Instruments with a fixed interest rate but variable interest amounts, for example due to indexed nominal (par) value, are classified as category "Debt instruments" with variable interest.

14. Attribute "Redemption/Reimbursement"
A possible premature repayment for tax reasons is not considered a call feature (values C, B, Q).
Premature partial repayments provided for a issuance are considered to be amortization plan or amortization plan with call feature (values A or B).
Debt issues with an index-linked principal amount paid at maturity are classified as fixed maturity (F).
Debt issues with double-dated redemption (prior to the final redemption date, a call for redemption can only occur after a specific date and not at any time during the duration of the stock) are classified as fixed maturity with call feature (C).
The standard does not provide any attribute for redemption's with a put option (redemption requested by the holder).

15. Type of Warrants that entitle holder to synthetic instruments
Warrants that entitle the warrant holder to synthetic instruments such as indices or others are classified as naked warrants (second attribute).

16. Warrants that are neither call nor put or both call and put warrants
Warrants that are neither call nor put warrants or both call and put warrants retain an "X" in the third attribute. Additional values may be added in a next version of the standard.

17. Private Placement Warrant issues
The CFI code does not differentiate between warrant issues that are offered to the general public or to a limited number of investors ("private placement"). Private placement warrant issues are classified like other warrant issues.

Events that lead to the allocation of a new CFI code for the same financial instrument:

Equities, Debt instruments, Entitlements:
- Change of form (e.g. from registered to bearer/registered)

Equities - Common/ordinary shares:
- Voting rights are changed by stockholders' meeting;
- Ownership restrictions are changed by stockholders' meeting;
- Transfer restrictions are changed by stockholder's meeting or government authority;
- Payment status is changed from nil paid to partly or fully paid, or from partly paid to fully paid

Equities - Units, i.e. unit trusts/mutual funds/OPCVM/OICVM:
- Change from closed-end to open-end fund or vice-versa, change of distribution policy or asset allocation, according to the decision of the fund managers or stockholders.

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