Classification of Financial Instruments (CFI)

What Is a Financial Instrument?

A financial instrument is a broad term encompassing assets that are tradable, serving as packages of capital available for trading. These instruments play a crucial role in facilitating the efficient flow and transfer of capital among global investors. They can take various forms, such as cash, a contractual right to deliver or receive cash, another type of financial instrument, or evidence of ownership in a particular entity.

Financial instruments can be broadly classified into cash instruments (representing tangible monetary value) and derivative instruments (deriving value from an underlying asset). Asset classes include debt-based financial instruments (e.g., bonds), equity-based financial instruments (e.g., stocks), and foreign exchange instruments (involving currencies). These categorizations provide a concise framework for understanding the diverse nature of financial instruments.

Common examples of financial instruments include stocks, exchange-traded funds (ETFs), bonds, certificates of deposit (CDs), mutual funds, loans, and derivatives contracts. These instruments serve as vehicles through which investors can engage in the financial markets and manage their capital.

What does the Classification of Financial Instruments Mean?

The Classification of Financial Instruments (CFI) is a vital six-letter code utilized in the financial services industry for the systematic classification and description of the structure and function of financial instruments, whether in the form of securities or contracts. This international standard, approved by the International Organization for Standardization (ISO), plays a crucial role in standardizing the identification of financial instruments.

Implemented since July 1, 2017, the CFI is assigned to a financial instrument concurrently with the allocation of its International Security Identification Number (ISIN) by the National Numbering Agency (NNA). This ensures a consistent and globally recognized system for identifying and categorizing financial instruments.

The six letters constituting the CFI hold specific significance, each representing a characteristic of the financial instrument. For instance, ESVUFB might be used to describe a typical registered share. These letters are drawn from the ISO basic Latin alphabet.

The initial letter of the CFI code designates the category, with E representing Equity (shares and similar instruments), D for Debt (especially bonds), and C for Collective Investment Vehicles (such as investment funds). Once assigned at the issuance of the financial instrument, the CFI typically remains unchanged throughout its lifespan.

History of CFI

1. 1997 - ISO 10962:1997. The CFI standard was initially accepted and published in 1997 as ISO 10962:1997, laying the foundation for a systematic classification system for financial instruments.

2. 2001 - ISO 10962:2001. The first revision of the standard, ISO 10962:2001, was published in 2001. This revision likely incorporated updates and refinements to improve the classification and description of financial instruments.

3. 2006 - FIX Protocol Proposal. In 2006, the FIX Protocol group proposed changes to the standard for consultation. This suggests a collaborative effort to enhance and adapt the CFI standard to evolving industry needs.

4. 2015 - ISO 10962:2015. The most recent comprehensive revision of the standard, ISO 10962:2015, was published in 2015. This version likely included refinements based on industry feedback and changes in the financial landscape.

5. 2019 - Revised Version for OTC Derivatives. In 2019, a revised version of the standard, primarily focusing on over-the-counter (OTC) derivatives, was published. This indicates a recognition of the evolving nature of financial instruments and the need for specific considerations in this domain.

6. 2021 - Latest Version with Externalized CFI Codes. The latest version, published in 2021, externalizes the CFI codes. This suggests a continued effort to improve the usability and implementation of the CFI standard, possibly making it more accessible and adaptable for industry participants.

Purpose of CFI Codes

1. Uniform Set of Codes. The CFI code provides a uniform set of codes for all market participants. It ensures consistency and clarity in the classification and description of financial instruments, promoting a standardized approach that is universally understood.

2. Global Recognition. By adhering to the ISO 10962 standard, the CFI code aims for global recognition. This facilitates communication and understanding among market participants worldwide, contributing to the efficiency of international financial transactions.

3. Issued by ANNA. The CFI code is issued by members of ANNA, the Association of National Numbering Agencies. ANNA plays a central role in coordinating the standardization efforts and ensuring that the code remains consistent and reliable across different jurisdictions.

4. Simplification for Increased Use. The ongoing efforts of the group involve simplifying the structure of the CFI code. This initiative aims to enhance its usability, making it more accessible to non-governmental market participants. Simplification can lead to increased adoption and understanding of the code across a broader spectrum of the financial industry.

Structure of CFI Codes

First Letter (Characterizing Categories)

• E: Equities

• D: Debt Instruments

• R: Rights/Entitlements

• O: Options

• F: Futures

• M: Miscellaneous

Second Letter (Specifying Groups)

For example, within the Debt Instruments category:

• B: Bonds

• C: Convertible bonds

• T: Medium-term notes

• Y: Money market instruments

• G: Mortgage-backed securities

• A: Asset-backed securities

• N: Municipal bonds

• D: Depositary receipts on debt instruments

Subsequent Letters (Symbols 3–6)

These indicate characteristics related to each group, such as rate type, redemption conditions, bond form, etc., especially pertinent for the Bonds group.

"X" as Undefined Attribute

If a specific attribute of a financial instrument is not defined due to lack of information, cannot be applied at the moment of code assignment, or is not applicable for the category or group, "X" is used. This is crucial for cases where certain details are yet to be determined or are not relevant.

Exceptions to Code Unchangeability

A CFI code typically remains unchanged, except in two scenarios:

• Replacing "X" symbols with specific ones during a financial instrument placement based on results or other actions determined by issue documents.

• Carrying out corporate actions and decisions by an issuer leading to a change in the essential characteristics of a financial instrument (e.g., a change in voting rights).

Example of a CFI code

An example of a CFI code is ESVUFA, and it can be decoded as follows:

• E: Equity

• S: Ordinary Share

• V: Voting

• U: No-restrictions

• F: Fully Paid

• A: Registered

So, in this case, a financial instrument with the CFI code ESVUFA represents a fully paid ordinary share with voting rights that is registered. This type of share aligns with those commonly traded on stock exchanges.

CFI vs. ISIN vs. FISN

ISIN (International Securities Identification Number)

• Definition. The ISIN is a unique code that identifies each series of securities or financial instruments.

• Format. Defined in ISO Standard 6166, the ISIN consists of 12 alphanumeric characters.

• Purpose. It is primarily used for uniquely identifying securities and is widely adopted internationally for this purpose.

CFI (Classification of Financial Instruments)

• Definition. The CFI code addresses challenges related to cross-border trading and the need for improved communication among market participants.

• Relationship with ISIN. The CFI code does not replace the ISIN code but works alongside it. It identifies the type and form of the security, complementing the ISIN for a comprehensive understanding of the financial instrument.

• Format. The CFI code comprises six Latin letters and provides a systematic classification of financial instruments.

FISN (Financial Instrument Short Name)

• Definition. The FISN code is a short, standardized description for financial instruments, aiming to harmonize market practices.

• Incorporation. It incorporates the issuer short name and abbreviated characteristics for the security or financial instrument.

• Format. The FISN has a maximum length of 35 alphanumeric characters and is designed to provide a concise yet informative description of the financial instrument.